Why Is the Dow Jones Falling So Sharply?

At long last (?), the big tech companies have announced large-scale layoffs.

Microsoft (MSFT) plans to lay off 11,000 people, Alphabet (GOOG) 12,000, and Meta (META) 11,000.

Alphabet in particular had held off on announcing layoffs until recently, but the size of its cuts is among the largest.

Stock prices have responded positively to this wave of mass layoffs. This is seen as reflecting one of major investors’ key complaints about tech companies: “They have too many employees, and they get paid too much.”

It is estimated that more than 80,000 people have been laid off in the tech industry since last year. Whether their careers were just beginning or well underway, their lives have clearly been disrupted, but the market has welcomed their pain.

It feels like the word irony was made for situations like this.

A new term, “rich-cession,” has already started to circulate.

As high-paying, high-income jobs disappear, spending by high earners is expected to fall, leading to a downturn among the wealthy.

You can see that the only index that really responded to the news of large-scale restructuring at tech companies was the Nasdaq, which rose (+0.61%).

What stands out is that the Dow Jones Industrial Average, which fell the least last year, posted the steepest weekly decline (-2.73%). As recession fears start to materialize, the index appears to be taking the hit.

The US dollar is also holding at levels well below last year’s peak.

The S&P 500 (-0.67%) and Russell 2000 (-1.09%) also declined, but their losses were milder than those of the Dow Jones Industrial Average.

Looking at weekly performance by sector gives us a clearer picture of why the Nasdaq managed to rise.

Aside from energy (+0.59%), the only sectors that gained were communication services (+1.43%) and information technology (+0.65%).

Communication services is home to companies like Alphabet (Google) and Meta that run digital advertising platforms, while information technology refers, quite literally, to the IT sector.

The weakness in utilities (-2.94%) and consumer staples (-2.84%), which had held up relatively well last year, is also notable.

On Wall Street, there is a growing perception that defensive stocks—which supposedly “protect” you in a downturn (a phrase I have never really understood)—have become far too expensive.

But it is impossible to say whether that perception is what pushed prices down, or whether falling prices in those sectors are what gave rise to that perception in the first place.

This pattern can also be seen in the YTD returns by index.

While the Nasdaq is up 6.2% this year, the Dow Jones Industrial Average has gained only about 0.7%.

That is why I still think it is too early to judge whether the current rebound is merely a bounce within a downtrend or the beginning of a sustained uptrend.

Three-line summary: