Among the three key U.S. equity gauges, the Dow Jones won in 2022 asSPDR Dow Jones Industrial Average ETF DIA (down 9.1% past year as of Jan 8, 2022) beat its peers SPDR S&P 500 ETF SPY (down 16.7%) and the Nasdaq (down 31%).
What Helped the Dow Jones in 2022?
The Dow Jones beat its peers because as rates were hiked to tame high inflation. Lenders demand higher interest rates to make up for the decline in purchasing power of the money that lenders will be repaid in the future. And rising rates are good for value stocks than growth ones as the latter’s cash flows come way out in the future.
The Dow Jones seems to be more immune to inflationary threats. The index has a better value quotient (0.14) than the S&P 500 (0.03), per etf.com. Investors should note that among the big three U.S. indexes, the Nasdaq seems to be the least immune to inflation as the index is tech heavy with about 60% exposure. The tech sector is high-growth in nature and thus the Nasdaq Composite tends to slide the most on a day that reports a spike in inflation. This explains the Nasdaq’s horrible performance last year.
Plus, the Dow Jones has highest exposure (20.78%) to healthcare stocks. Healthcare stocks are recession-proof in nature. Cheaper valuation was another tailwind. At the current level, Dow Jones has a P/E of 17.99X while the S&P 500 has a P/E of 21.70X. This was because the Dow Jones has suffered a lot in 2021, which provided the index leeway to fare better in 2022.
Will Dow Jones Top in 2023 Too?
With the economic setting remaining more-or-less the same, we expect the Dow Jones and value stocks to rule in 2023 as well. The Fed may slow down the rate hike momentum in 2023 as a lot has been done to tame inflation last year on the Fed front.
But we do not expect the Fed to pivot in 2023. To see the Fed cutting rates again, we may have to wait for another year. After all, the personal consumption expenditure (PCE) price index in the United States increased 5.5% in November 2022, which is way higher than the Fed’s target of 2%.
As far as valuation is concerned, the Dow Jones is still the cheapest among the big three U.S. equity gauges. If the U.S. economy hits a soft-landing in 2023, the Dow Jones will still rule as the index is heavy on value sectors like healthcare and financials. Industrial takes the third spot in the index.
Against this backdrop, investors may bet on Dow Jones ETFs like SPDR Dow Jones Industrial Average ETF Trust DIA, Guggenheim Dow Jones Industrial Average Dividend ETF DJD, iShares Dow Jones U.S. ETF IYY, ProShares Ultra Dow30 DDM and ProShares UltraPro Dow30 UDOW.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report