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Sunday, November 10th, 2013

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The Dow Jones Industrial Average — still the market indicator that commands the attention of investment laity — has been underperforming its brethren of late.  Since April 18, it has lagged the S&P 500 by 5.5% and the Nasdaq Composite by 11.8%.  That decline in relative performance versus the Nasdaq is plotted above on the shorter line that you see.

Shown via the longer line is the historic underperformance of the Dow versus the Nasdaq leading up to the popping of the dot-com bubble in March of 2000.  Down over sixty percent in relative terms.  Amazing.

Despite some days of late when the Dow had strong relative performance, it’s been mostly downhill versus the Nasdaq since April.  The two indexes have changed a lot since 2000, but they still play their roles:  The Nazz as some hip Hollywood hunk and, well, the Dow as some old fuddy-duddy like me.

Now is starting to feel a bit like then in some ways, although not nearly as extreme.  But with more investors talking about a possible melt-up in the markets, perhaps our old memories could come to life once again.

For what it’s worth, after the Nasdaq returned to Earth starting in early 2001, the two indexes have traded neck and neck throughout much of the subsequent period, with virtually identical performance from October of 1998, the start of the one line in the chart, to April of this year, the start of the other.  On a long-term chart showing the two indexes together, the widening gap since April looks very much like the epic diversion that started in late 1998.

Ah, memories.  (Chart:  Bloomberg terminal.)

For an important “piece” of the puzzle of how markets could behave the next time we run into a little difficulty, check out this posting on the risks posed by the asset management industry.