The Nasdaq And Dow Are Fighting Again. Here’s What It Means.

The “market” is fighting with itself like Blue and Red politicians

One of the nice things about having my college-age son home earlier than expected from his recent semester abroad (like every college kid who did the same) is that we get to sit around like the old days and watch baseball games together. OK, I am just kidding. Not much live sports these days.

But our other shared passion, investing, has prompted plenty of discussions between us lately. As he does some investment research work for me when he is able, he and I came across a pattern that I decided to dig deeper on. I’m glad I did. And I am glad I can share it with you.

Earlier this year, I wrote about the historical relationship between the Nasdaq 100 NDAQ, dominated by the investment icons of the 21st Century, and the blue-chip Dow Industrials, the 30 stocks that, to so many investors, are “the market.” I noted in that prior article that the Nasdaq looked poised to outperform the Dow for a while, and that this was not unexpected. As it turns out, the swings between the 2 “market” indexes can be quite wide. And, they have often followed a particular pattern.

This is the case 25 years after the Nasdaq burst on the scene as essentially the “sexy” corner of the stock market. Yet even though the Nasdaq is now a more mature index of stocks than in the past, it is dominated by a small number of companies. Nearly half the Nasdaq 100 Index is in 5 companies, all of which are household names to investors. Two of those companies (Apple AAPL and Microsoft MSFT) are in the Dow as well. The others (Amazon AMZN, Facebook, Google/Alphabet) are not. Those 3 also do not pay dividends.

The chart above shows the 20-year history of surges in the Nasdaq 100 versus the Dow, and vice-versa. The bottom part shows the percent gain of the Nasdaq 100 over the Dow for each 3-month time frame since late 1999. In other words, when the number is high, Nasdaq is outperforming over 3 months. When it is low, Dow has outperformed over 3 months.

Current conditions

On the far right of the chart, you can see that for the past 3 months (through May 13), the Nasdaq 100 (QQQ) has performed 14% better than the Dow (DIA). When we put that in historical perspective, I think that not only Tyler (my son) and I will take it seriously.

Let’s summarize the history of this pair in round numbers

As of 3/10/2000, QQQ outperformed DIA by 55%…in 3 months! That’s the Dot-Com Bubble for you. By 6/14/2000, the 3-month return of DIA was 25% higher than that of QQQ.

Similar pairs of QQQ beats DIA by a lot, followed by DIA beats QQQ by a lot include:

12/31/2001 and 4/4/2001: 21%, then 25% the other way

6/17/2008 and 11/25/08: 15% and 15%

5/13/2020 and ?: 14.47% and ?

Hopefully you see my point. A wide difference in performance over 3 months between these 2 popular market-tracking indicators is pretty rare. But perhaps more importantly, they tend to ebb and flow like this in the early stages of bear markets. Frankly, any time I see something that only occurred around 2000-2002, 2007-2009 and during the past year or so, my portfolio manager antenna goes up. I dig deeper.

In fact, if you look back at dozens of articles I have written in this space since 2018, you will see that identifying those patterns for you is a focus of this column. I think my son and I have found another one. Now, it’s up to you to decide if you care, and if you do, what you do about it.

What’s in your portfolio’s wallet?

This is a pretty big deal to those approaching retirement. That’s because the more Nasdaq 100 exposure you have had in your portfolio the past decade, the better you probably performed. That can create a false sense of security. I am not touting the future prospects of any market segment here. However, any investor that just saw their portfolio plunge, then recover, and does not know how much of that was driven by this most recent phase of Nasdaq dominance over the Dow should examine what they own. And then, explain to yourself why you own it.

Or, ask your financial advisor what you own and why you own it. If they can’t answer you in a heartbeat, that’s one more risk to add to the pile of risks all investors confront in these unusual times.

Related: S&P 500 Indicates A Bear Market. Or Does It?