Is it time to buy June’s 3 worst performing Dow Jones stocks?
Most investors recognize that this year’s selloff was led by the same growth stocks that soared last year. However, it’s not just growth stocks that are losing ground here. Full of blue chips Dow Jones Industrial Average (^ DJI 0.00%) now sits nearly 17% below the January high, losing nearly 7% of its value in June alone. Of course, that means about half of Dow voters lost even more ground last month.
And it’s these names in particular – June’s worst performers – that deserve a closer look now. Have these names been sold wrongly because the market itself is in freefall? Or are investors legitimately concerned about the foreseeable future of these companies?
If it is the first, do not hesitate to “buy in the palm of your hand”. If it’s the latter, you might want to keep your placement powder dry, because there’s something bigger going on.
What went wrong in June
Cut to the chase: Last month’s biggest Dow losers are a chemical company Dow (DOW -1.86%)credit card giant American Express (AXP -0.53%)and industrial giant caterpillar (CAT -2.54%)down 24%, 18% and 17%, respectively.
Don’t look for a particular reason why shares of chemical company Dow fell in June. You won’t find any. Instead, know that this selloff is part of a larger selloff that works against most commodities and related stocks. The Dow Jones commodities index is now 12% below its peak in early June, on growing fears that the Federal Reserve’s aggressive rate-hike plans will not only stifle the inflation that has drive up all material prices, but could also trigger a recession that undermines demand for any and all materials.
It’s ultimately the same reason why shares of American Express also lost so much ground in June. With the potential for a full-blown recession on the horizon, a service that only facilitates spending is not well-placed for such an environment. Exorbitant credit card interest rates (despite near-record rates on all other fronts) do little more than prevent consumers from charging for goods and services.
Finally, add Caterpillar to last month’s list of the Dow’s biggest losers, again for the same general reason. In other words, although the future of the construction market looked bright a year ago, it has darkened considerably in recent weeks. Earlier this month, the US Census Bureau reported that the nation’s annualized pace of construction spending in May fell slightly from April’s level, with planned spending on major projects typically requiring heavy equipment falling further. more than spending on smaller projects like single-family homes. While we’ve seen monthly lulls a few times since the start of 2020, these earlier cases are tied to pandemic-related logistical hurdles. This slowdown may well be rooted in lower demand.
The question remains: are any of these stocks buying after last month’s considerable setbacks?
Answer: No, but not just for the reason you might think.
Take the clue
As seasoned investors (and longtime Motley Fool readers) will attest, getting into a stock just because it’s been beaten isn’t reason enough to buy a stock. That stock should always be worth owning, and it should always be worth the price you pay. A calendar month sale is not a good enough reason to get started; it never was.
There’s something else to consider this time around though. Simply put, these sell-offs are a wake-up call for much larger market-wide problems that cannot be attributed to a little unfortunate downside volatility.
Think about it. Of the three losses outlined above (not to mention the pullback in the Dow Jones Industrial Average as well), economic weakness is the primary driver. It’s not the kind of news-driven weakness that gets quickly ignored. This is a well-reasoned and calculated sell-off, ultimately rooted in investors’ assessment of the foreseeable future. They don’t like what they see. And who could blame them? It seems increasingly that the Federal Reserve has no choice but to wage an outright war on inflation. This creates massive collateral damage as a result. Worse perhaps, there is no guarantee that the Fed’s efforts will actually curb the inflation it is supposed to curb anytime soon.
Then there’s the other headwind – the calendar. Summer is usually a slow time for stocks anyway and can be decidedly bearish once a bear market has materialized.
Uncertainty can be a big problem
None of this is to say that American Express, Dow and Caterpillar are doomed forever. All three are good companies, and these three stocks will rise again. Indeed, each can be closer to a bottom than not. It is not inconceivable, in fact, that the prices of all three tickers could be much higher in just a few months (provided the market tide also improves).
Nor is this to suggest that timing should be a major consideration when it comes to buying and selling stocks.
Rather, it’s simply to say that no one should ever be in a hurry to get into stocks just because they’ve been sold a little too much, too quickly – there’s always more to the story. In this case, the “plus” is the fact that we simply don’t know how well the economy can absorb inflation and the interest rate increases that it brings. All we know is that whatever is in the charts, none of this is good news for the construction, consumer and commodity chemical markets. It could take months for these companies to emerge from this cloud of uncertainty. Best to avoid most of these tickers until then, at least.