After the Dow Jones Industrials (DJINDICES:^DJI) suffered 450 points' worth of losses in the first three trading days of 2015, investors (DJINDICES:^DJI) had started to wonder when the market benchmark would ever turn itself around. Wednesday morning brought at least some relief, as the Dow had climbed almost 200 points as of noon EST.
Some of the bullishness in the market came from the energy sector, where crude oil prices saw a pause in their downward march in recent months, spurring hopes that the much-punished commodity markets could be approaching a new equilibrium that will at least return stability to the investing community. Yet even as nearly all of the Dow's 30 component stocks rose, telecom giants AT&T (NYSE:T) and Verizon (NYSE:VZ) were notable for missing out on the bounce.
2 reasons telecoms are underperforming today
One reason why AT&T and Verizon aren't rewarding their shareholders in today's market bounce is that most investors see their stocks as having different exposure to the state of the economy than the rest of their Dow Jones Industrial peers. Even though their vast wireless empires give them plenty of growth opportunities, Verizon's and AT&T's high dividend yields make some investors focus solely on their potential to provide investment income. As a result, for several days now, telecom stocks have moved out of sync with the rest of the market; yesterday's stock market plunge came at the same time that bond yields were hitting multiyear lows and sending bond prices soaring. To the extent that investors see AT&T and Verizon primarily as income investments, their shares will move more in line with bond prices. Therefore, when those two markets diverge, you'll see pressure in the telecom sector that can pull share prices in different directions than you'd expect.
Yet from a longer-term perspective, telecoms were among the worst-performing sectors in 2014, and the two Dow telecom giants have had to react to increasingly competitive conditions in the industry. In particular, up-and-coming rival T-Mobile (NASDAQ:TMUS) has upped the ante in the fight for wireless subscribers, offering customers valuable services like unlimited data and no penalties for going over plan limits on voice, text, or data usage. That in turn has forced AT&T and Verizon to consider margin-reducing concessions of their own in order to keep their respective market shares up, and promotional moves are likely to weigh on earnings so long as T-Mobile can keep up its efforts.
Moreover, as the U.S. market becomes more saturated, it's uncertain where Verizon and AT&T will look for growth. For its part, Verizon's massive $130 billion buyout of its former partner's stake in its U.S. wireless business committed the company to focus on its domestic operations for the foreseeable future. Meanwhile, AT&T has more opportunities to consider foreign ventures, but so far, it has been slow to make major strategic moves. Barring groundbreaking moves from either company, concerns about long-term future growth are justified.
For market investors, today's moves in the Dow and in telecom stocks show how important it is not simply to look at broad-based market measures to judge investing success. If you can isolate losing stocks and keep them out of your portfolio before they do irreparable damage, then you can boost your chances of outperforming the Dow and reaping the returns that can make a big difference in your long-term finances.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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