Why China's Weighing Down the Dow


It's an unimpressive start to the week for the Dow Jones Industrial Average . While the index is still holding steady above 14,000 and has clawed its way back from bigger losses earlier, as of 2:15 p.m. EST the Dow has shed six points, or 0.04%. Stocks are fairly evenly split between gainers and losers, but industrials, weighed down by negative news from Asia, are keeping the index muted.

China hammers the industrial sector
The Chinese government announced a new plan to curb swelling housing prices in the world's second-largest economy. The government said Friday that it would enforce 20% capital-gains taxes on sales of existing homes while also introducing restrictions to purchasing new properties, such as increasing down payments and loan rates. The moves are an attempt to stem the nation's growing housing bubble, but experts fear that they could lead to a fall in demand -- something that would negatively impact the biggest industrial players and manufacturers, many of which have turned to China's development for their own future growth.

China's worries, along with the impact of federal budget cuts accompanying sequestration -- cuts White House aides and congressional leadership claim will last for weeks, if not months or longer -- have industrial stocks hurting today. Caterpillar leads all Dow laggards lower, down 2.3%, while fellow industrial players Alcoa and United Technologies trail close behind with respective losses of 1.4% and 1.5%.

China is the largest consumer of raw materials, and a pullback in the growing nation could seriously impact revenues at these companies -- in particular at materials firms such as Alcoa and the leading steelmaking companies. Alcoa has lost more than 14% over the past year, and China's moves are particularly poorly timed as the company struggles to navigate the post-sequestration world.

Retail stocks are keeping the Dow from succumbing to the industrial sector's pain, however. Wal-Mart and Home Depot rank among the Dow's leaders, with shares gaining 1.4% and 1.2%, respectively. Home Depot got a boost early last week after reporting expectations that topped projections, with the rebuilding efforts after last year's Hurricane Sandy helping to drive sales. This stock has been a top pick for the Dow recently, gaining more than 45% over the past year as the U.S. housing market rebounds. If housing continues to gain momentum, expect Home Depot to keep on rising with it.

As for Wal-Mart? Syvlia Matthews Burwell, the head of the Walmart Foundation -- the company's charitable arm -- was nominated by President Obama to lead the White House's Office of Management and Budget today. Still, with Wal-Mart leadership lamenting the "total disaster" of February sales, the company's in hot water. If consumer spending remains subdued as the payroll tax hike squeezes American budgets, Wal-Mart could be headed for more trouble. Don't take too much away from the stock's good day today.

Reasons for concern?
Caterpillar's the big loser today, and if a China slowdown comes to pass, the company could end up hurting. This industrial giant is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. But with uncertainty in the air, is Caterpillar worth your investment? Read all about Caterpillar's strengths and weaknesses in our brand-new report. Just click here to access it now.

The article Why China's Weighing Down the Dow originally appeared on Fool.com.

Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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