Understanding the Nasdaq Correction: Key Insights for Investors

The Nasdaq, alongside the S&P 500 and the Dow Jones Industrial Average, has seen a significant rise in the last two years, bringing in impressive double-digit gains. This trend continued into 2023, as investors were eager to dive into high-growth companies that focus on innovative technologies such as artificial intelligence and quantum computing—until recently.

In the last few weeks, however, a dip in consumer confidence reported in February, along with a disappointing jobs report, created doubt about the economic outlook and its effect on corporate earnings. Furthermore, there has been growing concern about certain actions taken by President Trump, including implementing tariffs on imports from Mexico, Canada, and China, which were announced last week but delayed by a month for items included in the US-Mexico-Canada Agreement.

As a consequence, several leading growth stocks, notably Nvidia and Amazon, have faced sharp declines, pushing the tech-heavy Nasdaq into a correction phase. This situation might prompt investors to reconsider their stock purchases. Before making any decisions, here are three crucial points to understand about the current Nasdaq correction.

1. Corrections don't always indicate a larger drop is imminent.

The Nasdaq officially entered correction territory on March 6, having fallen over 10% from its peak on December 16. However, it did show some recovery in the subsequent trading sessions, finishing down by 9.8% from the peak. Remember, a correction occurs when an index drops between 10% and 20% from its high.

While it is too soon to say how long this correction will last, history offers some encouraging insights: out of 11 Nasdaq corrections since 2010, 10 have led to positive returns within the following year, with an average gain of over 21%. Although past performance isn’t a guarantee of future results, this track record suggests that corrections don’t necessarily indicate that more losses are on the way.

2. Now is a great time for bargain hunting.

Watching stocks in your portfolio decrease in value is never pleasant. However, market corrections present an opportunity to acquire some of your favorite stocks at a more appealing price point—making it a prime moment for bargain hunting.

During the recent bull run, stock valuations, especially for many companies listed on the S&P 500, soared. A useful tool for assessing this is the Shiller CAPE ratio, which adjusts stock prices and earnings per share over a decade to smooth out economic fluctuations.

As the market boomed, the Shiller CAPE ratio reached a level of 37, a historical peak only seen twice since the late 1950s. Currently, it is still elevated at about 35, but it is gradually decreasing.

In this context, many stocks, including those on the Nasdaq like Nvidia and Amazon, are becoming more affordable as the market corrects itself. For instance, Nvidia now trades at 25 times its projected earnings, down from 48 earlier this year, while Amazon has dropped to 31 times its forward earnings estimates, compared to 45 a few months ago. This indicates that now could be an excellent time to invest.

3. Focus on the long term to enhance your investment strategy.

Although it’s challenging to overlook current market turmoil, especially if your investments are impacted, it’s essential to maintain a long-term perspective. When evaluating stock performance over a longer timeline, it becomes clear that stock indexes historically recover from downturns and subsequently increase in value, as illustrated by the Nasdaq’s trends since 2010.

From this standpoint, individual corrections often appear small, meaning if you invest in fundamentally strong companies or related assets, market fluctuations are unlikely to drastically diminish your returns. A long-term investment strategy involves holding onto quality assets for a minimum of five years, with even more favorable outcomes for holdings maintained for ten years or longer.

Focusing on firms with robust long-term prospects can help shield you from the effects of economic setbacks and challenging market conditions. With this strategy, you can navigate through market corrections more comfortably, capitalize on attractive buying opportunities, and ultimately position yourself for long-term success.

John Mackey, the former CEO of Whole Foods Market and part of Amazon’s leadership, serves on the board of The Motley Fool. Adria Cimino holds investments in Amazon. The Motley Fool has staked interests in Nvidia and Amazon and recommends both. Please refer to their disclosure policy for more information.

Nasdaq, Correction, Investors