Market Insights: Nasdaq and Dow Jones Industrial Performance Gap

Milestone Wealth Management Ltd. - May 19, 2023

Market Insights

Macroeconomic and Market Developments:

North American markets were mixed this week. In Canada, the S&P/TSX Composite Index declined 0.34%. In the U.S., the Dow Jones Industrial Average increased 0.38% and the S&P 500 Index rallied 1.65%.
The Canadian dollar rose this week, closing at 74.05 cents vs 73.76 cents last Friday.
Oil prices were positive this week. U.S. West Texas crude closed at US$71.70 vs US$70.12 last Friday, and the Western Canadian Select price closed at US$50.69 vs US$49.62 last Friday.
The price of gold dropped this week, closing at US$1,977 vs US$2,011 last Friday.
Newmont Corp. (NGT) has acquired Australian rival Newcrest Mining Ltd. (NCM) for US$19.2 billion. The purchase will consolidate its position as the world’s biggest bullion producer with mines across the Americas, Africa, Australia, and Papua New Guinea.
The project announced between Stellantis and LG Energy Solution Ltd. last year has halted construction as they wage a battle for more public money from Canada. Prime Minister Justin Trudeau’s government has already offered up to C$13 billion to Volkswagen AG to lure a vehicle battery plant to Ontario. Canada’s industry minister says the Ontario government hasn’t committed to paying its “fair share” to help advance negotiations with automaker Stellantis NV over an electric-vehicle battery plant. As of Friday, Ontario’s Premier announced additional funding to get the project back on track.
After steadily declining for months, inflation in Canada unexpectedly reaccelerated, with CPI rising 4.4% in April from a year ago vs economists’ expectations of 4.1%. The increase marks the first acceleration in headline inflation since June 2022 and a rise from the 4.3% increase year-over-year announced in March. The rise in recent inflation numbers and the continuing strength of the Canadian job market have increased talks of further rate increases by the Bank of Canada.
In the US, Industrial Production Increased 0.5% in April vs a consensus expected 0.0% and retail sales rose 0.4% in April vs. the expected consensus gain of 0.8%. Slowing retail sales can be viewed as a leading indicator for a weakening economy with inflation affecting consumers’ spending habits.
Target (TGT) announced this week that Q1 earnings and revenue beat expectations with earnings per share coming in at $2.05 vs. $1.76 expected and revenue coming in at $25.32 billon vs. $25.29 billion expected.
Walmart (WMT) raised its full-year forecast Thursday, as fiscal first-quarter sales rose nearly 8% and its large grocery business helped offset weaker sales of clothing and electronics. Earnings per share came in at $1.47 adjusted vs. $1.32 expected on revenue of $152.30 billion vs. $148.76 billion expected.
Onex (ONEX) owned WestJet Group (WJA) and the Air Line Pilots Association, which represents WestJet and Swoop pilots, have reached a last-minute tentative agreement on the “second collective bargaining agreement” between the organizations, averting a strike that was scheduled for early Friday morning.
Deere (DE) announced on Friday that earnings and revenue increase Q2 with earnings jumping 42% to $9.65/share and revenue increasing 30% to $17.39 billion.

Weekly Diversion:

Charts of the Week:

The Nasdaq Composite has significantly outperformed the Dow Jones Industrial Average Index (DJIA) so far year-to-date (YTD). As of May 18th, the Nasdaq was up 20.4% YTD on a price basis and the Dow Jones was up just 0.3%, for a difference of 20.1%, or the equivalent of what many consider a bull market (over 20%). The Nasdaq is heavily weighted towards companies in the Technology sector which have seen values steadily rise this year after the steep sell-off in 2022. Since the Nasdaq launched in early 1972, there have only been three other years where the index outperformed the DJIA by more than 15 percentage points YTD through 5/18, but 2023 is on pace to go down as the only year where the performance gap exceeded 20 percentage points as shown in the chart below.

Source: Bespoke Investment Group

The following charts are snapshots of both indices during the past four occurrences (including this time) where the Nasdaq outperformed the DJIA by at least 15% YTD. Each set of charts shows the performance of the index in the top section with the gray shading showing the period from the start of the year through May 18th and the white section the balance of the year. The bottom sections of each chart show the relative strength of the Nasdaq versus the DJIA where a rising line indicates the percentage outperformance on the part of the Nasdaq and vice versa.

Of the three prior occurrences, the Nasdaq continued to outperform the DJIA by a wide margin for the remainder of the year in two of them (1991 and 2020). We will note that 2020 was an extreme anomaly with the COVID collapse and rapid recovery, so we would put less importance on that instance. In 1983, on the other hand, the Nasdaq declined 8.2% for the remainder of the year giving up all its prior outperformance as the DJIA rallied 4.6%. However, more importantly, the much broader DJIA Index saw a significant rally in each of these instances with the average return for the remainder of the year at 12.93%. We do recognize that there is a limited data set, but in each of the prior events the Nasdaq could be seen as a leading indicator for broader market rallies, and we view this as a positive.

Source: Bespoke Investment Group

In more positive news for the Tech sector, the Nasdaq 100 Index (NDX) which tracks the 100 largest non-financial companies listed on the broader Nasdaq Index (mostly tech-related companies), flashed a new daily 252 trading day high channel breakout signal for the first time in a year. There have only been a limited number of these prior occurrences (4) since 1985, but as we can see in the chart below, this signal has been very positive for both the Nasdaq 100 Index and the S&P 500 Index with average returns for the Nasdaq 100 of 10.13% after three months, 13.67% after six months, and 17.67% after one year, while the S&P 500 averaged returns of 5.43% after three months, 11.83% after six months, and 15.52% after one year. These points in time are illustrated by the small red circles on the line chart.

Source: The Chart Report, Nautilus Research

Sources: CNBC.com, Globe and Mail, Financial Post, BNN Bloomberg, Thomson Reuters, Refinitiv, Bespoke Investment Group, The Chart Report, Business Insider, Nautilus Research

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Opinions and estimates are written as of the date of this report and may change without notice. Any commentaries, reports or other content are provided for your information only and are not considered investment advice. Readers should not act on this information without first consulting Milestone, their investment advisor, tax advisor, financial planner or lawyer. This communication is intended for Canadian residents only and does not constitute as an offer or solicitation by anyone in any jurisdiction in which such an offer is not allowed.