Dow Jones Effect on The Indian Market

Key takeaways

• The Dow Jones Industrial Average is a key U.S. stock market index that tracks 30 major companies and reflects overall market performance.
• The Dow Jones affects Indian markets by influencing global investor sentiment and foreign investments.
• Indian investors can analyse and track Dow Jones to understand its possible impact on the Indian markets and make investments accordingly.

If you are familiar with the Indian stock market or have heard news related to it, you must be familiar with Sensex and Nifty. It is a common practice to quote Sensex and Nifty and how they have performed to gauge the overall performance of the Indian stock market. These are commonly known as indices and include the stocks of relevant companies which have huge market capitalisation. Based on the performance of a specific index, investors can understand how the market is performing and make investments accordingly. One similar stock market index in the United States is the Dow Jones, and its performance can impact the Indian stock market and your investments.
 

If you are an Indian investor, it is crucial to understand the impact of US stock indices on the Indian stock market. This blog will help you understand the Dow Jones effect on the Indian market and how you can analyse the index to make better investment decisions.

The Dow Jones Industrial Average (DJIA), often simply known as the Dow Jones, is a US stock market index that is one of the oldest and most widely recognised worldwide. It was created by Charles Dow and Edward Jones in 1896 and serves as a benchmark for the overall health of the U.S. stock market and economy. The DJIA includes 30 large and publicly traded companies in the US, and the companies are from a wide range of industries such as healthcare, finance, technology, FMCG, etc.
 

The DJIA is globally significant as companies that are market leaders worldwide are part of Dow Jones, and its performance is considered to have a major impact on various industries in international markets. Unlike other indices that are weighted based on market capitalisation, Dow Jones is weighted based on price. This means that stocks with higher share prices have a greater influence on the index’s movement than those with lower share prices, irrespective of the company’s overall size.
 

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Before you understand the Dow Jones effect on Indian markets, it is important to understand a term called correlation. Correlation is a financial metric that measures the mutual relationship between two factors and represents how the change in one will create change in the other. In the last ten years, the Sensex has generated a 9.70% compounded annual return, while the Dow Jones has generated 9.75%. There have been instances of close correlation of the Indian market. The collapse of Lehman Brothers in the US in 2008 created a global financial crisis and led to a major decline in the Dow Jones. The same effect was seen on the Sensex, which also declined significantly as foreign institutional investors (FIIs) pulled out funds, leading to a liquidity crunch in the Indian market.
 

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Here are the factors that create a correlation between the Dow Jones and the Indian stock market, dictating the Dow Jones effect on Indian markets:

• Investor sentiment: The Dow Jones is considered as a major indicator of global investor sentiment. A strong or weak performance of the Dow Jones largely impacts the investment interest of investors worldwide, including in India. If Dow Jones is falling, Indian investors may start a sell-off, leading to a fall in Indian indices.
• Foreign institutional investors (FIIs): FIIs majorly impact the direction of the Indian stock market, and their investments in the Indian market are often influenced by the trends in Dow Jones. When the Dow performs well, FIIs may allocate more capital to emerging markets like India, driving up stock prices. However, they may sell their Indian investments if the Dow Jones is falling.
• Economic ties: India and the US are economically interconnected through trade, investment, and services. Many large Indian companies have significant business interests in the US, and many US companies serve customers in India. Any shift in the US economy based on the Dow Jones performance can significantly impact their financial performance and negatively affect their Indian operations.
   

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The Dow Jones effect on Indian markets has always been significant. Here are some case studies for a better understanding:
 

Case study 1: The 2008 financial crisis

The Dow Jones started collapsing from 14,000 points in late 2007 to 6,500 points by March 2008. The Sensex mirrored the Dow Jones’s performance and dropped by 1408 points to 9,716 points by the end of 2008, marking one of the worst declines in Indian stock market history.
 

Case study 2: COVID-19 pandemic

In March 2020, the Dow Jones plummeted nearly 6,400 points in a matter of four days due to fears over the COVID-19 pandemic. The Sensex also saw the same collapse, witnessing its worst single-day drop of 3,935 points in March 2020.
 

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The Dow Jones is one of the most sought-after and widely recognised indices worldwide. Market participants such as FIIs, retail investors, and financial entities use its performance to base their domestic and international investments. The Dow Jones effect on the Indian market has always been significant as it includes 30 of the largest publicly traded companies that are market leaders in their own fields. Now that you know the Dow Jones effect on Indian markets, you can analyse its performance to understand its possible effect on your Indian investments.
 

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