The NASDAQ composite index contains more than 3,000 US stocks. It is home to many of the large tech giants, including Microsoft and Apple, along with other innovative companies such as Tesla. It has performed exceptionally well over the past year, beating many other stock indexes around the world. The NASDAQ is up 31% over the past year, but suffered its worst day in months yesterday by falling 2.8%.
NASDAQ coming under pressure
Although the volatility in an index filled with tech stocks is expected to be high, the drawdown yesterday was larger than we saw in other stock markets. For example, here in the UK, the FTSE 100 index was down around 0.5% and held above the psychologically important 7,000 point level.
The main reason the NASDAQ fell significantly yesterday was because investors were selling riskier assets and looking for safer havens. At a very broad level, this involved selling stocks and moving into cash. But among stocks, it translated into selling tech stocks in particular. Tech stocks are seen as high growth companies, but at the same time high risk.
Why are investors concerned? I think this is simply a continuation of the wobble we saw in global markets earlier in September. The main concerns are a potential economic slowdown in China, along with rising inflation worries.
The additional factor in play yesterday was that we saw yields on 10-year US Treasury bonds break above 1.5%. That particular yield is used by many investors as a barometer to indicate what the interest rate might be in the future. This is also negative for tech stocks on the NASDAQ that are laden with debt. Higher interest rates in the future will make it more expensive for these firms to issue new debt.
Is the tech trend over?
Some call the move higher in tech stocks in recent years a bubble. Others say it’s a trend. However you want to look at it, it’s certainly been a part of the market that has generated high returns. The NASDAQ index has almost tripled in value over a five-year period.
I think that helps to put the move yesterday into perspective. If I was a long-term holder of a NASDAQ tracker fund, a 2.8% move isn’t much in comparison to the gains I would have already received from previous months or years. It actually supports my investing mindset of ignoring short-term moves as much as possible and looking years ahead.
A lot of the large firms that dominate the index (think Apple, Amazon, Tesla) are here to stay in my opinion. The business models operated are sound and have been proven over several years.
Therefore, although I think we could see a continued wobble in coming days on the NASDAQ, I think the long-term trend is still higher. If we do see the index track lower this week, I’ll consider buying a tracker fund next week.
jonathansmith1 has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, Microsoft, and Tesla. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.