Why is the Dow the underperformer?

The U.S. recession talk has been going on since last October, so this topic should be nothing new if you have been keeping up with the markets. Really, it is just a matter of when not if anymore. During this same time, everyone was advising to put money overseas in the stronger emerging markets (China, Russia, Brazil, and India) and avoid the frail American economy. Recently however, there are now talks that the U.S. slowdown will spill over into the global market.

The rise in commodity prices, especially crude oil, has crimped the American economy – consumer and corporation. The analysts are now expecting the emerging markets to slow with the American economy.

The Dow Jones Industrial Average contains 30 stocks which have enormous overseas exposure. The S&P 500 contains many of the same stocks, but there are also smaller, more domestically based companies that will not be as affected by slowing global demand. So relatively, the S&P 500 components are not as dependent on the global markets as the Dow components are.

For instance, Alcoa, Boeing, Hewlett-Packard, IBM, Intel, Coca-Cola, McDonald’s, and Proctor & Gamble (just to name a few) are all Dow components that rely heavily on international sales (and the weak U.S. dollar). These companies almost rely more on their international sales than their domestic sales (some actually do more business overseas).

This change in the global growth forecast has negatively affected American companies, especially ones that sell goods to these once-growing, now thought to be slowing, emerging economies.

Also, you can look at the Russell 2000 Index which tracks small cap stocks (minimal international exposure). This index has outpaced the S&P 500 by 4% over the last month and a half.