The 1 Reason the Dow Is Tanking Today

Before you go, we thought you'd like these...
Before you go close icon

Well, 2012 has certainly fooled investors. The Dow Jones Industrials Average (INDEX: ^DJI) rocketed higher for three months, then drove off a cliff and erased the gains in just four weeks. Today's 2% drop puts us below the 2012 open price, and left investors wondering where the good times went. Here is how the other indexes are faring today.

Index

Gain/(Loss)

Gain/(Loss) %

Intraday Value

Dow Jones Industrial Average(253.4)(2.0%)12,140
Nasdaq(73.8)(2.6%)2,753
S&P 500(30.2)(2.3%)1,280

Source: Fool.com.

Why the long face?
Today's dive comes down to one word: unemployment. The numbers are in from the jobs report and they ain't pretty (at least not as pretty as we'd like). Payrolls expanded by 69,000 jobs last month, but economists had their fingers crossed for a 150,000 gain instead. Today's numbers indicate the slowest pace for jobs growth so far this year, and were accompanied with a rise in the unemployment rate to 8.2%.


Wait a second: If we're adding jobs, how'd the rate go back up? The answer lies in more people returning to the job force to look for work. Remember when the unemployment rate fell to 8.1% recently and everyone was thrilled? The unfortunate reality of that figure was that the unemployment rate partially declined because people simply stopped looking for work. That's like winning a race because everyone else got disqualified; you'll walk home with the medal, technically.

Given the current trajectory of unemployment from the peak rate of 10% in 2009 to today, it would take over four and a half years to return to the "normal" unemployment rate of 5%, and probably longer if you consider that some of the rate declines we've seen have been technicalities.

The consequence?
The resulting tremors reverberating through the market today are being felt in some sectors more than others, but the worst-performing sector is consumer cyclical stocks. The sector is down 2.9% on the whole, with some companies faring even worse.

Ford (NYS: F) is down 3.8% while apparel plays like lululemon (NAS: LULU) and Under Armour (NYS: UA) are getting crushed with 5.1% and 5.7% losses, respectively. And it makes sense. The largest single driver of consumer consumption is the unemployment rate. With it ticking upward, luxuries like $100 yoga pants and fancy moisture-wicking athletic gear are going to find themselves on the bottom of at least 8.2% of consumers' shopping lists (if they're there at all).

It's easy to expect the same trend to affect automakers. As what is typically the second most expensive purchase in someone's life, it's logical to assume consumers will justify putting off a new car purchase just a little longer. However, May auto sales actually surged 11%, the highest monthly gain since 2009. Ford's U.S. sales rose 13%. The reason is that as consumers put off new car purchases during the recession, the ranks of old clunkers swelled to capacity. With the average age of automobiles owned at an all-time high, some people just simply have to buy a new car at some point, regardless of what the unemployment rate looks like. Today's drop could be a buying opportunity.

Lastly, the VIX (INDEX: ^VIX) , or "fear index," as it is commonly called, is up 5.74%. This isn't as much as the daily spikes we've seen in recent weeks, but it builds off of double-digit daily gains over the last month. Taking a look at a five-year chart, though, and it's still well below the three recent spikes that came after the Lehman collapse and other global jitters. The patient investor made it through those times, and will likely make it through this recent jump as well.

How to play it
If anything, you should use this contrast as yet another reason to buy and hold great companies for the long haul and forget about the gut-wrenching gyrations the market seems to insist on daily. You can start building out your portfolio of home-run stocks with "The Motley Fool's Top Stock for 2012." We've created a special free report for investors to uncover this soon-to-be rock star. The report highlights a company that is revolutionizing commerce in Latin America, and you can get instant access to the name of this company by clicking here to download it now.

At the time this article was published Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Ford, lululemon athletica, and Under Armour. Motley Fool newsletter services have recommended buying shares of Ford, Under Armour, and lululemon athletica, as well as creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners