Dow Jones Industrials/Nasdaq-100 ratio
Comment of the Day

July 20 2023

Commentary by Eoin Treacy

Dow Jones Industrials/Nasdaq-100 ratio

Eoin Treacy's view

I can’t remember the last time the Dow Industrials rose while the Nasdaq fell. That prompted me to look at the ratio. The long swing of outperformance of large technology companies relative to big blue-chips has only been interrupted by the Nasdaq crash in the early 2000s and the 2022 sell-off.

There is no arguing with the fact that tech companies have persistently optimized so efficiency gains help to create value out of nothing. That’s quite different from the traditional view of value which is based on discounting future cashflows and depends on predictability.

The fact the ratio has bounced from the same level on two occasions separated by 20 years is a coincidence. The fact it is bouncing again from that area today is noteworthy. It suggests there is some other factor worthy of consideration or possibly that we don’t have enough data.

The value/growth ETF ratio is also steadying in the region of its lows.

The commonality with MSCI US / MSCI World ex-US ratio is beginning to highlight that perhaps the best chance of non tech markets outperforming runs through a scenario where predictable revenues and growth that is not tech dependent takes precedence. For that to happen either tech will need to fail to continue to innovate and/or the predictable revenue side of the economy will need to stage a major comeback.

The alternative is that even the prospect of positive real rates is enough to lend the value sector a favour ear from investors. 

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