Why the Dow Struggled This December

The Dow Jones Industrial Average entered December hoping for a “Santa Claus rally” to counter its weak start to the month. But for the second consecutive year, Wall Street’s holiday cheer failed to arrive.

By the end of December, the Dow had dropped 5.3%, marking its worst December performance since 2018 and its steepest monthly decline since September 2022, according to Dow Jones Market Data. In comparison, the S&P 500 fell a milder 2.5%, while the Nasdaq Composite managed to gain 0.5%, leaving the Dow trailing behind.

Early Optimism Fades

December began on a strong note for the Dow, buoyed by a post-Election Day rally that propelled the index past the 45,000 mark for the first time on December 4. “We’ve had a pretty tremendous run-up,” said Charlie Ripley, senior investment strategist at Allianz Investment Management, suggesting the rally may have made a pullback inevitable.

However, the momentum didn’t last. While the S&P 500 remained flat and the Nasdaq continued climbing, the Dow started slipping mid-month. The downward trend accelerated on December 18 after the Federal Reserve’s policy meeting.

Despite announcing another rate cut, Fed Chair Jerome Powell’s forecast of only two 25-basis-point cuts in 2025 and his warnings about persistent inflation rattled investors. “We got that negative shock from Powell,” said Steve Sosnick, chief strategist at Interactive Brokers. Although Powell’s comments were consistent with expectations, they were more hawkish than the market’s most optimistic players had hoped.

Thin Holiday Trading Exacerbates Losses

The Fed-induced downturn extended into the holiday season, a period typically characterized by lighter trading volumes. While this time of year often boosts stocks, the thin liquidity amplified market volatility.

“When people are taking profits or cutting losses, the reduced volume can lead to more exaggerated moves,” Ripley explained.

Why the Dow Struggled More

The Dow’s underperformance in December stemmed largely from its structure and composition. Unlike the market-cap-weighted S&P 500 and Nasdaq Composite, the Dow is price-weighted, meaning that higher-priced stocks carry more influence over its movements.

For instance, Apple’s 4% gain in December had less impact than Microsoft’s losses. Meanwhile, top-performing tech stocks like Alphabet (+10%) and Tesla (+16%)—neither of which are part of the Dow—bolstered the Nasdaq but had no effect on the Dow’s performance.

“Tech is driving the market,” Sosnick said. “And the Dow just isn’t tech-heavy.”

The Dow also faced company-specific challenges. UnitedHealth Group, the index’s second-most influential stock, struggled after the tragic death of CEO Brian Thompson on December 4. Other blue-chip names like Caterpillar, Home Depot, and Sherwin-Williams also posted significant losses, further dragging the index down.

A Mixed Year-End

Despite its December slump, the Dow ended 2024 with a 12.9% annual gain and a 28.4% increase over the past two years. However, this performance lagged behind the S&P 500, which gained 53.2%, and the Nasdaq Composite, which surged 84.5% over the same period.

The Dow’s December downturn highlights its limitations as a barometer of market health. Its price-weighted structure and narrower sector representation can lead to significant disparities compared to broader indexes. As Ripley pointed out, “There are months when the Dow just doesn’t align with the rest of the market.”

For investors, this serves as a reminder to focus on a diversified portfolio rather than relying on any single index to gauge market performance.