The Dow Jones Index has entered a correction this year, having dropped by over 13% from its highest level. The index, which tracks 30 blue-chip companies, was trading at $39,100, and has recently formed a death cross for the first time in over three years. This article examines the three primary reasons for its crash and how its stocks are performing.
3 reasons why the Dow Jones Index crashed
There are three main reasons why the Dow Jones Index has plummeted this year. First, it has dropped because of the Federal Reserve, which has maintained a more hawkish tone this year. It slashed rates three times last year, and pointed to two more this year even as the economy slows.
Most Fed officials who have talked recently have said that the bank was ready to intervene if the economy slowed drastically.
At the same time, Donald Trump is studying whether he has the power to fire Jerome Powell from the Fed. Such a move would be unprecedented and would raise questions about the bank’s independence.
Historically, US assets, such as stocks and the US dollar, have performed well due to the perceived independence of the Fed.
Second, the Dow Jones Index has also plummeted due to the ongoing trade war, which risks pushing the US into a deep recession. The base 10% tariff and the 145% rate from China has raised concerns that the US economy will continue weakening. Analysts believe that corporate earnings will be impacted.
Third, the Dow Jones has declined due to its exposure to technology. It holds tech companies like Microsoft, Apple, Salesforce, and NVIDIA. While these are all good companies, there is a risk that they will slow down as signs that the AI bubble is bursting emerges.
Dow Jones Index stocks performance
Most companies in the Dow Jones Industrial Average have declined this year. Still, some all-weather firms have done well because they are less exposed to US tariffs on other countries.
Coca-Cola stock price has jumped by 17% this year because its business does well in all market conditions. Customers will not stop drinking soda because of a recession or stagflation.
Verizon stock has risen by 10% this year, while Johnson & Johnson, IBM, McDonald’s, Amgen, Travelers, Visa, and Walmart have all risen by over 4%. These firms – except IBM – are all-weather companies that are less exposed to tariff measures.
Nike is the worst-performing Dow Jones stock this year as it crashed by 27%. This decline is due to the company facing substantial competition from firms such as On Holding, Adidas, and Under Armour. Also, the management’s efforts to turn around the firm are taking longer to achieve results.
Tech firms like Salesforce, NVDIA, Amazon, Apple, and Microsoft have all plunged by over 22% this year. This decline is due to the woes in the technology sector and its perceived overvaluation.
The other top laggards in the Dow Jones are firms like Walt Disney, Caterpillar, American Express, and Honeywell International.
Looking ahead, the Dow Jones price action will depend on the Fed and Donald Trump. A sign that the Fed is prepared to cut interest rates will be bullish thing for the index.
Further, the start of negotiations with other countries, especially China, will be a bullish thing for the index.
The ongoing earnings season will largely have no major impact on the Dow Jones and other US indices as the results don’t include Trump’s tariffs.
History shows that the Dow Jones and other US indices like the S&P 500 and Nasdaq indices, always recover from a correction.
Read more: Is it safe to buy the dip in the S&P 500 index ETFs like SPY and VOO?
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