The Dow Jones Industrial Average (^DJI -0.53%) may be up 3.5% from last month's low, but the blue-chip index is still sitting 6% below last month's high. Perhaps more alarming for investors, the index is currently priced more or less where it was back in early December. And, between then and now, it has ended more days in the red than in the black.
This weakness may well indicate the market is fighting a battle it's ultimately going to lose, destined to fall below the lows it reached when the Dow plummeted more than 10% in January.
Image source: Getty Images.
If that possibility has you stressed out and stuck on the sidelines, here's some food for thought.
Nothing unusual
You can thank Salesforce.com (CRM -0.24%) and Nike (NKE -1.64%), mostly, for this DJIA dip. Shares of the former are down about 18.6% year to date, and Nike is lower to the tune of 15.8%. Home Depot (HD -0.54%) is doing similarly poorly. Not only are these three stocks dragging on the index's overall value, they're setting a bearish tone that keeps other companies in it from moving as high as they otherwise might.
The question is, however -- have the Dow's laggards done all of the damage they can do for the time being?
Answer: Nobody knows for sure, but it doesn't really matter. These are the sorts of details people consider when they've gotten excessively caught up in the market's daily oscillations and the headlines they generate.
That's not an attempt to avoid answering, mind you. It's just an explanation that there is no simple answer to that simplistic question.
Stock prices ebb and flow all the time -- in the short run. Sometimes they rise and fall rather dramatically (as happened in January). Those near-term ups and downs aren't necessarily driven by any sort of logic, though. Unrelated news, assumptions, and investors just filling in their own mental blanks all play roles in the market's day-to-day action, which is highly prone to reversals. To illustrate that, consider that the Dow changed the general direction it was moving a total of 67 times last year. More to the point, investors collectively changed their views of the market 67 different times in 2021.
Certainly, economic matters evolved during the year in question, but the market's fundamental undertones didn't reverse course several dozen times in 2021. No, the Dow Jones Industrial Average is erratic from one day to the next because people are fickle. People were particularly fickle in January.
This is far from a new idea. Indeed, it's exactly what is being referred to in the pithy quote most often attributed to legendary value investor Benjamin Graham: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
A nuance worth adding to this idea, by the way, is that we tend to vote with our hearts and weigh with our heads. January's tumble was an emotionally charged vote rooted in people's fears about the omicron-driven pandemic surge, the impact of soaring inflation, and rising interest rates. Right now, though -- even with stocks on the defensive again -- level-headed investors are weighing the fact that corporate earnings are expected to rise this year, despite all of the macroeconomic challenges.
Focus on the important things, and don't sweat the rest
Here's the rub: This isn't necessarily a bullish call either.
All bear markets start out as relatively small stumbles not unlike the one we just suffered. And, inflation, rising interest rates, and political bickering are just some of the potential pitfalls that could drag on earnings. The specter of a Russian invasion of Ukraine isn't helping things either. Also, bear in mind that prior to the onset of the COVID-19 pandemic, the market had rallied for 12 years. So, to the extent sheer time plays a role in the matter, all the ambiguous excesses of a prolonged bull market may still be in place.
In other words, it's entirely possible earnings will end up contracting this year even if the market's collective wisdom doesn't see it coming yet. That would, of course, prove a drag on stocks. The Dow's tepid performance in recent weeks may reflect investors subconsciously predicting that outcome.
Except, we just don't know what the future holds, near or distant. The best we can do is assess the market's landscape every day and update our opinions accordingly. To do that, though, we have to worry less about the size of sell-offs or the search for laser-precise entry and exit points. Instead, it's better to focus more on the information that ultimately matters, like companies' overall health. For the time being, the market's blue chips remain pretty healthy.
There's a simpler way of putting all of this, by the way. If a trader moving in and out of the Dow Jones Industrial Average stocks in an attempt to time the market had missed out on the 10 most bullish days the index experienced in 2021, instead of enjoying its full-year gain of 18.7%, their results would have been pared back to barely better than breakeven. Given that nobody can know in advance when those few key big trading days will occur, your best bet is simply staying in stocks, even if it means taking a few lumps along the way.
