Why DJI Just Had Its Longest Losing Streak In 50 Years?

The U.S. stock market has been on the rise in 2024, despite changes in the political landscape and the continuous emergence of geopolitical crises. The S&P 500 has closed at a new high nearly 60 times this year and has been hovering at historical highs recently. The Nasdaq index broke through 20,000 points for the first time in history and has continued to reach new highs; the Dow Jones Industrial Average stood above 45,000 points for the first time.

The Citigroup Levkovich Index shows that market optimism is high. The index combines many indicators, showing that historically, investors have only been more optimistic than now on two occasions, once during the post-pandemic SPAC/marijuana/green bubble period, and the other during the internet bubble period of 1999-2000. The monthly survey by the Conference Board shows that U.S. households have never been as confident in the rise of the stock market in the coming year as they are now.

Amid almost unanimous optimistic expectations on Wall Street, the Dow Jones Industrial Average has fallen for nine consecutive trading days, setting the longest losing streak since 1978 and pouring a bucket of cold water on the U.S. stock market. According to FactSet data, the Dow had experienced an 11-day losing streak in 1974, and since then, it has never had a losing streak of 10 days or longer.

The prolonged decline of the Dow coincides with the Federal Reserve's last interest rate meeting in December, and the policy outlook for 2025 also brings several question marks.

Several Wall Street analysts suggest that with the latest batch of economic data released, a 25 basis point rate cut by the Federal Reserve has almost become a consensus, and the market's concern is more focused on economic forecast updates and dot plot announcements. If the 10-year U.S. Treasury yield breaks through the resistance level at the end of this week, it will mean a reversal of the cyclical downtrend in the long-term uptrend.

Warnings about the stock market bubble have also emerged with the Dow's decline. Previously, Trump's victory in the November U.S. presidential election, the prospect of interest rate cuts, and a record $186 billion inflow of funds into the U.S. stock market, most predictions for the U.S. stock market were still focused on the S&P 500 index, which is expected to welcome a Santa Claus rally in the last few trading days of 2024.

Market participants who still hold an optimistic view point out that the Dow Jones Industrial Average, composed of 30 companies, is a price-weighted index. The recent decline in the Dow is mainly due to the sharp drop in health insurance companies, which are facing the biggest political risk in recent years.

On the one hand, the elected President Trump vowed to eliminate intermediaries in the pharmaceutical industry, and the stock was widely sold off, with the health insurance company's stock price plummeting by 20% this month alone. In addition, the news of the assassination of Brian Thompson, CEO of the health insurance division of UnitedHealth, also put the company through a period of turmoil. In the past eight trading days, the plummeting UnitedHealth has actually driven more than half of the index's decline.

Moreover, investors have begun to sell cyclical stocks in the Dow, such as Sherwin-Williams, Caterpillar, and Goldman Sachs, which usually rise during economic recoveries. These stocks, which belong to the financial and industrial sectors, are seen as beneficiaries of Trump's deregulation and economic support policies. Now they may face higher interest rates and trade uncertainty, which has led to a decline in investors' enthusiasm for buying, and they have all fallen by at least 5% in December, dragging the Dow down overall.

In addition, NVIDIA, which was just included in the Dow in November, has also experienced a significant pullback recently. The Dow's composition has a low weight in technology stocks, and thus can only enjoy limited benefits from the AI wave. However, NVIDIA has fallen more than 10% from its previous high, becoming one of the drags. Some analysts believe that Wall Street is paying attention to the demand for ASICs by large technology companies, such as whether companies like Meta and Alphabet prefer to use ASICs instead of expensive GPUs in generative AI applications, which may also have led to the decline in NVIDIA's stock.

However, investors who believe that the Dow's decline is not a big deal, because the Dow's price-weighted nature means it cannot capture the huge gains of large-cap stocks like the S&P 500 or the Nasdaq. Dow's calculation method adds the prices of the 30 constituent stocks and then divides them by a factor that takes into account changes such as stock splits and the addition of new stocks. After all, the overall decline of the Dow is relatively moderate, with the cumulative drawdown from the historical high at the beginning of December to the recent low being less than 4%.

Looking ahead, voices suggesting that the U.S. stock market may have reached a critical point of collapse are few and far between. Currently, only Bank of America warns that the U.S. stock market may face both the AI bubble and the impact of Trump's policies in 2025. AI is similar to the internet in the late 90s, and the bubble will burst sooner or later. If Trump fulfills his campaign promises, it may bring a brief prosperity to the U.S. stock market, but at the same time, it will add fuel to the fire, leading to a great depression.

An economist at JPMorgan pointed out t that the Dow is mainly composed of blue-chip consumer and industrial stocks and is widely regarded as a representative of the overall state of the U.S. economy. The latest initial jobless claims data showed a slight increase, and market concerns about economic weakness have once again heated up, leading to continued selling of the Dow. But these are more like fluctuations on the rise of the U.S. stock market. The most important thing is how long the Dow will continue to decline; the longer it lasts, the more it becomes an issue that cannot be ignored, rather than a statistical fluke.

As a reference, investors need to be alert that the S&P 500 index has seen more stocks falling than rising for 12 consecutive days. This is the second-longest record in nearly 100 years. If we really talk about it, it may have a greater eyeball effect than the Dow's 46-year-longest daily consecutive decline. Although the S&P 500 index is still setting new highs, the number of stocks above the 200-day moving average is continuing to decrease. In the current high expectations, the U.S. stock market may disappoint. When the market bulls may have advanced a large amount of future gains in advance, this brings the risk of poor performance in 2025.

In addition, tariff concerns have raised inflation expectations for the United States in 2025. Next year's core PCE inflation expectations have risen from 2.3% to 2.5%, and the expected number of Fed rate cuts has been reduced to three times, each by 25 basis points, with the federal funds rate expected to be between 3.5% and 3.75% by the end of the year. There are also institutions predicting that there will be only two rate cuts next year, lower than the four rate cuts implied by the Fed's September dot plot. Barclays said that the Fed has the opportunity to stop quantitative tightening (QT) before the end of 2025.

Most importantly, whether Trump's re-election will have a positive impact on the stock market as Wall Street expects is also uncertain.