If you have been following the stock market these past few weeks things have not looked pretty. The Nasdaq, which is an index primarily made up of growth and technology stocks, dropped 13.8% in April, the largest monthly drop since the great financial crisis of 2008.
Yes, you read that write- 2008. This past month was worse on tech stocks than the initial shock waves of Covid in March and April of 2020.
Currently, the Nasdaq composite sits nearly 24% off of its intra-day high posted back in November of last year-putting it officially in a bear market. The largest and most innovative companies in the index including Amazon, Netflix, and Facebook have seen gut-wrenching drops in their share price, seeing hundreds of billions of dollars in shareholder equity vanish like Kevin Durant's jumper in the first round of this year's NBA playoffs. (Too soon Brooklyn fans?)
You may be asking yourself as an investor or market observant- how could this be? As I mentioned last month in my post, I am not buying it, the job market is the strongest it has ever been, we are seeing record amounts of consumer spending and corporate earnings, and we have one of the most violent economic contractions in world history in the rear-view mirror.
So why are we all of a sudden so bearish?
This is a loaded question, and one that can have a lot of different answers. A few mainstream narratives that experts and analysts will point to would be:
Inflation! AHHH! 8.5% the highest level since 1981!!! We're doomed!!!
Consumers hate inflation like the Lakers hated the Celtics back in the 80's. (I've been watching that HBO doc Winning Time about the Magic Johnson Lakers dynasty and its phenomenal, highly recommend). When inflation rises, consumers lose their buying power and are often times put in economic hardship. For those in the lower class, rising prices in gas and food can cause significant stresses on daily life, and can provide for sometimes very bleak and difficult economic choices.
However.
Inflation is often times very subjective to how it can impact an individual. For example, a large component of inflation is gas prices- which a person living in a major US city who takes the train may not necessarily even recognize.
Many consumers are over-thinking how much buying power they are actually losing in the market, and inflationary fears are often times not as life-altering as many think. It also fundamentally does not make sense to sell stocks in periods of high inflationary environments.
Historically US stocks have acted as one of, if not the best hedges against inflation. As prices rise, corporations for better or worse typically pass on the higher prices onto consumers, and can often times even post better earnings in these periods depending on the sector. (Think consumer staples, oil, energy)
Rising Rates
Now this argument is actually one I believe to be the most important on what is moving the market and changing sentiment so aggressively.
You may have heard discussion around rising mortgage rates, and how they are impacting people's mortgages. This is because as rates rise, the cost of capital goes up, limiting the amount of money that people can borrow. Rising rates also have an effect on how large institutional investors allocate their client's money into the markets.
In periods of low interest rates, when the cost of capital is cheap, investors are incentivized to go out further on the "risk curve". Typically, the further you go out on the risk curve correlates to investing into stocks that are considered "Growth Stocks" or, stocks that are valued based on their future growth potential, vs there current existing earnings and business model. These growth stocks are synonymous with the Nasdaq index, which until recently was on an absolute face-ripping tear over the last decade. Check out the 10 year chart of the index below:
The last decade has provided us with some of the best market returns in history, thanks in largely to historically low interest rates and revolutionary technological innovation. The Nasdaq has 6x itself since 2010, and had an average return of over 14% per year in this time.
So now as we enter new economic conditions in a post-covid and stimulus world, investors are readjusting their relationship with risk and these tech names. Which brings us to today's market outlook, which has many investors fearful and concerned on what to do with their investments, or how to consider investing more money into the market.
Sticking to the plan.
Now first and foremost I am NOT a financial advisor. So this is not professional financial advice. This is just my perspective on the current state of the market, and my own philosophy of how I am investing my own money.
As I have written in the past, the most important aspect of building wealth and gaining our most valuable asset of time through achieving financial independence comes from time IN the market, not timING the market.
Since I graduated college and began investing, I have regularly invested into my Roth IRA (which if you don't have PLEASE take a read of my blog on Roth IRAs here and open one as soon as you can) as well as my 401k. Every two weeks I invest into the market, regardless if the market is up or down. High rates, low rates, covid, war, elections, doesn't matter what is happening, I am buying. Because that's my plan.
In order to achieve long-term success in the market, it is essential to have a plan. It is also essential to STAY invested. Like anything in life, there is no reward without risk. These difficult times serve as excellent reminders to the price we pay for the returns the market has generated for generations.
So while it is important to be educated and understand what factors are moving the market, it is even more important to recognize how vital it is to include these downturns in the expectations of your financial plans, and allow for time and compounding to work their magic.
I personally believe that investor sentiment has been far too negative, and do not believe in the US falling into a recession any time soon. While I understand the need for investors to readjust their allocations due to the changing rate environment, I believe that we will look back on this pullback in the Nasdaq as an excellent opportunity to buy some of the best companies in the world at these highly discounted levels.