Despite the pandemic the broader stock market had a great run in 2020 and 2021, closing out the year near record levels. The tides have turned though. Stock market rallies have been cobbled with the Nasdaq in correction territory, which is defined as a drop of more than 10% but no more than 20% from a recent peak.
What Is the Outlook for the Nasdaq and Stock Market?
This is the 66th time the Nasdaq has booked a correction since 1971. Not only is the Nasdaq down more than 10% from its November 22, 201 peak its also down more than 10% since the start of 2022.
It’s not just the Nasdaq that is tumbling, the S&P 500 is down more than eight percent from its recent highs, while the Dow Jones Industrial Average has dropped seven percent. The TSX is faring better than its U.S. peers, down just four percent from its record levels.
Rising interest rates are largely to blame for the Nasdaq selling off. To tame soaring inflation, the U.S. Federal Reserve is expected to announce three to four 0.25% rate hikes in 2022. Interest rates are near historic lows of 0.25%: three rate hikes would mean interest rates would spike 300% to 400% in 2022.
Tech stocks do not do well in a high interest rate environment. That’s because most are not profitable and are relying on expected earnings in the distant future from their still bourgeoning, disruptive concepts.
When 10-year yields rise, as they are now, expensive stocks, like those in the tech sector, underperform value stocks. That said, all major indexes are in the red on fears of rising interest rates.
What happens historically when the Nasdaq falls into record territory? Of those 66 stock market corrections, 24 of them have resulted in bear markets, or declines of at least 20% from a recent high.
What history also shows is that correction on the Nasdaq have served as near and long-term buying opportunities, with subsequent gains coming in the weeks and months following a bottom.
Most recently, after bottoming on March 8, 2021, the Nasdaq logged solid gains for the one-week, two-week, three-week and one-month, three-month, and six-month period. The Nasdaq followed a similar path after falling into correction territory in September 2020, registering growth for the following year.
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