Don't Call it a Correction! The Nasdaq's Hurting, but the Dow Barely Noticed

Don't call it a correction just yet! Sure, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down -- slightly -- from its month-ago levels, and the formerly high-flying Nasdaq Composite (NASDAQINDEX: ^IXIC  ) is down over 6% from mid-March.

^DJI Chart

^DJI data by YCharts.

But when we pull back the curtain and look at the indices' year-to-date performances, we find that things aren't all that bad. In fact, the S&P 500 (SNPINDEX: ^GSPC  ) has barely moved from its Jan. 1 opening value, and the other major indices are each down less than 3%:

^DJI Chart

^DJI data by YCharts.

You can see a worse "correction" in late January and early February, when the Dow became the worst-performing major index, dropping all of 7% in a couple of weeks as the other two indices followed it to losses of roughly 5% each. If the Dow and the S&P 500 follow the Nasdaq into 5%-loss territory, it might happen a bit faster than usual, but it'll hardly be cause for alarm. After all, a 5% drop is so common that it typically fades into the background noise of market commentary within a week of ending.

According to Marquette Associates, a 5% to 10% drop has occurred in at least a third of all trading years since 1950, while only 8% of those years experienced no decline of at least 5%. All told, "corrections" that shaved anywhere from 5% to 20% off the S&P 500's value have happened in three out of every four years since 1950. On a longer timeline, 5% drops are pretty darn common -- from the start of the 20th century to the end of last year, the Dow experienced about three such declines every year, according to American Funds. The last 5% decline in the Dow before the one that hit this February took place last October, just half a year ago. Do you remember that? Probably not, since the "correction" is barely visible on a chart that begins at the start of that month:

^DJI Chart

^DJI data by YCharts.

At this stage, it's not even a correction in any index save the Nasdaq, and much commentary has rightly pointed out that it's the high-flying stocks with exorbitant valuations that have gotten the worst haircuts. The past month's worst S&P 500 stocks are nearly all traded on the Nasdaq: Netflix (NASDAQ: NFLX  ) and TripAdvisor (NASDAQ: TRIP  ) have led the dive, with each losing roughly a quarter of their value. Despite that, both still sport some of the highest multiples on the market, and their fellow biggest losers are generally members of that high-P/E club as well:

Stock

Past-Month Decline

Current P/E 

Netflix

(24.6%)

179.8

TripAdvisor

(24.4%)

57.7

Gilead Sciences (NASDAQ: GILD  )

(14.9%)

37.6

Facebook (NASDAQ: FB  )

(17%)

100.8

Amazon.com (NASDAQ: AMZN  )

(15.6%)

538.7

E*Trade (NASDAQ: ETFC  )

(13.2%)

71.0

Sources: Finviz and YCharts.

On the other hand, the largest stocks on the market have barely moved over the past month. Apple (NASDAQ: AAPL  ) , with a $465 billion market cap and a 13 P/E, has declined by roughly 2.5% -- right in line with the decline in the S&P itself. ExxonMobil (NYSE: XOM  ) and Microsoft (NASDAQ: MSFT  ) , the two Dow stocks with the largest market caps, have both gained about 3% in value over the past month. Neither sports a P/E above 15.

Is it a correction? Perhaps, if you're the sort who prefers to invest heavily in high-flying momentum stocks or in big bets on future opportunities. For value investors, it's still a relatively calm market -- and the recent turbulence of this correction that wasn't (at least it isn't yet, not with all three indices now working valiantly to return to positive territory after an ugly opening-bell drop) could be the right time to diversify into some more-affordable growth stocks.

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  • Report this Comment On April 11, 2014, at 1:39 PM, EquityBull wrote:

    Excellent perspective! thanks!

  • Report this Comment On April 12, 2014, at 4:15 AM, Interventizio wrote:

    I agree. However, it's reasonable to sell some assets and to lock in some gains from some stocks in the portfolio that have no longer value proposition after last year's run.

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