Even though the Dow Jones industrial average has climbed back above 10,000 this month, it’s been a laggard among benchmarks for the world’s biggest stock markets in 2003.
Next year, the Dow may vault to the front of the pack as investors shift their focus to larger companies, said Patricia Van Kampen, of Mason Street Advisors LLC.
“For the Dow to outperform next year, we’d have to assume we will get more of a transition back into larger stocks,” said Van Kampen, whose firm manages $60 billion in Milwaukee. “That’s very likely to happen.”
The Dow cracked the 10,000 mark on Dec. 9 and closed above that level on Dec. 11 for the first time since May 2002. The Dow initially exceeded that mark in March 1999.
This year, the Dow has gained 21 percent, trailing benchmarks from the Standard & Poor’s 500 index to the Venezuela Stock Market index, the world’s best performer. Only the United Kingdom’s FTSE 100 index, the Amsterdam Exchanges index and two indexes of Chinese stocks have fared worse in dollar terms among the 59 global benchmarks tracked by Bloomberg News.
Investors have flocked to shares of smaller, less-established companies during a nine-month rally on expectations they would be the first and biggest beneficiaries of an improving economy. As the pace of profit growth slows, they may look to bigger companies with steadier earnings, Van Kampen said.
The Russell 2000 index of small-company stocks has surged 40 percent this year. The tech-laden Nasdaq composite index has advanced 44 percent.
Intel Corp., the world’s biggest chipmaker, is one of two Dow members to trade on the Nasdaq stock market. It’s also the benchmark’s best performer in 2003, as the stock has almost doubled. The other, Microsoft Corp., has risen 5.6 percent.
The appeal of stocks in the Dow average already may be on the upswing. The benchmark has advanced 4.5 percent this month, surpassing the S&P 500’s 1.6 percent gain. The Nasdaq declined 1.8 percent. The Russell 2000 has fallen 1.6 percent.
The Dow’s current members include six of the world’s seven largest companies by market value: General Electric Co., Microsoft Corp., Exxon Mobil Corp., Citigroup Inc., Wal-Mart Stores Inc. and Intel Corp. Only Pfizer Inc., the third largest, is not in the index.
Technology companies, the best performers in the stock market this year as an industry, have less representation in the Dow than in other benchmarks. They account for 13 percent of the average, compared with 18 percent of the S&P 500 and 42 percent of the Nasdaq.
An index of technology stocks in the S&P 500 has gained 42 percent this year, while the Nasdaq Computer Index is up 46 percent.
Some of the Dow’s members may have a better year in 2004 than they did in 2003. Shares of Merck & Co. and Johnson & Johnson, the index’s two drugmakers, have fallen this year on concern that the absence of new blockbuster medicines would crimp profits.
The declines may be an overreaction, said Robert Mitchell, a money manager at Northern Trust Corp. in Chicago.
“You’ve got stocks in here that are large and, let’s say, have had issues this year,” said Mitchell, whose firm oversees $430 billion. “They’ve been priced for a worst-case scenario.”
Merck has fallen 19 percent this year, and Johnson & Johnson has lost 8.0 percent. But both stocks have advanced in December.
Other Dow members to rise this month include Exxon Mobil, the world’s largest publicly traded oil company. The stock has trailed the average by gaining 8.9 percent in 2003.
“Those that were laggards, like energy and health care, have become potential leaders,” said Steven Young, chief investment strategist at Banc of America Capital Management in St. Louis, which oversees $318 billion. “If that carries over into next year, the Dow should do better.”
