Dow Stocks Like Microsoft, Apple, Disney, and Verizon Reveal Two Sides of the Market

After a brutal 2022, the stock market is roaring in 2023, with the Nasdaq Composite up 26% and the S&P 500 up 11% year to date (YTD) at the time of this writing. Yet dig deeper and you'll find some peculiar price action in many well-known names.

Six of the 30 components of the Dow Jones Industrial Average (NYSEMKT:DJIA) are within 5% of their 52-week lows, and eight are within 5% of their 52-week highs as of Friday's close.

The Dow isn't a perfect index. But it does a fine job of reflecting the broader U.S. economy, especially as more tech stocks have been added to the index in response to the growing share tech holds in the market capitalization of the broader stock market.

Let's find out why a sizable portion of these blue-chip names are performing so poorly, while others are leading the stock market higher.

Image source: Getty Images.

Winners and losers

This isn't the first time we've seen a stock market where certain sectors are doing well while others are performing badly. In 2020, many small-cap growth stocks left oil and gas and financials in the dust. In 2022, value stocks did much better than growth stocks, particularly large-cap value. Let's look at the 14 Dow stocks hovering around new highs or lows.

Data source: Yahoo! Finance. Data as of market close May 26, 2023.

As you can tell by the names in the table, 2023 is far more nuanced than years past. Retail as a whole is under pressure. But Walmart is within 5% of its 52-week high, while Target (NYSE:TGT) is within 5% of its 52-week low. Similarly, McDonald's is within 5% of its 52-week high, while many of its large-cap value peers have sold off. 3M, an industrial conglomerate, is near its 10-year low, while Boeing is within 10% of its 52-week high.

As far as sector trends go, tech and financial stocks are generally doing quite well, while healthcare and many cyclical stocks have sold off. This explains some of the weaknesses in J&J, Amgen, and Walgreens. And then there's Walt Disney, which, despite being in the market-outperforming consumer discretionary sector, is hovering around an eight-year low.

Microsoft continues to find itself in the spotlight, mainly due to its investments in artificial intelligence (AI). Microsoft is now knocking on the door of a $2.5 trillion market cap.

Meanwhile, Apple has been a consistent performer, and finds its stock near an all-time high and approaching a $3 trillion market cap despite fears of slower consumer spending.

Salesforce was the worst Dow stock in 2022, when it fell 48%. However, Salesforce has been the best-performing Dow stock so far this year, and is up about 60% year to date -- driven in part by an overall sector rebound, but also by Salesforce's solid numbers that indicate the stock suffered excessive selling in 2022. Zoom out, and Salesforce is still down 10% during the past two years.

Making sense of the data

Bull markets and bear markets include some combination of sector rotation. In bear markets, investors tend to gravitate toward safe stocks, like utilities, consumer staples, and healthcare. In bull markets, investors want to take on more risk for more potential reward -- and may sell positions in stodgier names to bet on growth trends like AI.

The price action in many Dow names mirrors what we are seeing throughout the stock market, which is that companies with proven stories are getting rewarded, while companies that have failed to meet investor expectations are getting punished. In other words, the market is showing intolerance toward companies with blemishes, sloppy execution, and messy situations, and exuberance toward companies that keep delivering on promises.

For example, Walmart has done a much better job maintaining strong margins and navigating inventory challenges than Target. Disney is undergoing a restructuring, steep cost cuts, and layoffs. Beyond that, the company has yet to show consistent profitability at its Disney+ streaming service. So Disney stock is near new lows, while Netflix is at a 52-week high.

3M's failure to hit its projections and its product liability and environmental woes have led to a further sell-off. J&J is undergoing a restructuring of its own, spinning off its personal care business. And Verizon has continued to lose market share to T-Mobile and AT&T, leading investors to dump the shares in favor of those of its competitors. The list goes on and on.

The divergence between winners and losers means that many Dow stocks are either drastically beating or significantly underperforming the Dow's year-to-date decline of more than 3%.

Don't take the stock market's price action for granted

Even if you don't personally own any of the stocks discussed, their price action can provide valuable insight that can help you navigate the stock market in the years to come.

One is to be in tune with the market's temperament. Investor sentiment at any given time can lead to some stocks becoming overvalued or underappreciated bargains almost at random. The meme and unprofitable growth stock boom in 2020 and 2021 is an example of unrealistic enthusiasm, while the collapse of big tech stocks in 2022 and subsequent rebound in 2023 may be an example of the market reckoning with overshooting.

Here are a few questions you can ask about a stock that's making new highs:

Why is this stock heavily in favor right now?

Does the future growth potential justify the recent price appreciation?

What would happen if fundamentals weakened?

Is the stock priced for perfection, or is there room for error?

Here are a few questions you can ask about a stock that's making new lows:

Why is this stock out of favor right now?

Is the company showing meaningful progress toward regaining shareholder trust, or are investors merely hoping the company turns things around?

Is the stock priced for more disappointment, and if so, does that mean most of the negative sentiment is already factored in?

Take what the market gives

Another insight is to take what the market gives you. As an individual investor, you have the advantage of getting to decide when to buy and sell a stock. Unlike professional and instititional investors who are criticized for their quarterly performance relative to a benchmark, all that matters to you and your family is achieving your financial goals. You don't have to chase a stock that's run up out of fear of missing out, nor do you have sell a position that has crashed out of fear of being stuck with a loser.

The ups and downs of the Dow stocks is a study in the merit of diversification. Having positions in different sectors helps offset underperformance and smooths out the randomness that comes from the market cycle.

Finally, always remember to avoid getting caught up in the noise. One way to do that is by aligning your investments with your personal risk tolerance and interests. That way you can rest easy at night and have the patience to let positions compound over time rather than pay too much attention to whatever is being rewarded or punished in the stock market at any given time.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has the following options: long June 2023 $89 calls on Walt Disney, long June 2023 $92 calls on Walt Disney, long June 2023 $94 calls on Walt Disney, long June 2025 $105 calls on Walt Disney, long June 2025 $120 calls on Walt Disney, long October 2023 $145 calls on Target, long September 2023 $130 calls on Target, short June 2023 $90 calls on Walt Disney, short June 2023 $93 calls on Walt Disney, short June 2023 $95 calls on Walt Disney, short June 2025 $110 calls on Walt Disney, and short October 2023 $150 calls on Target. The Motley Fool has positions in and recommends Apple, Cisco Systems, JPMorgan Chase, Microsoft, Netflix, Salesforce, Target, Visa, Walmart, and Walt Disney. The Motley Fool recommends 3M, Amgen, Johnson & Johnson, T-Mobile US, and Verizon Communications and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.