After so many months of absolutely crushing the rest of the stock market, the recent underperformance from the Nasdaq Composite (NASDAQINDEX:^IXIC) has raised some eyebrows. Even though the Nasdaq was closest to setting new record highs as the stock market surged last week, it has hung back even as other market benchmarks moved more sharply higher.
At least for today, though, the Nasdaq decided it had had enough. Wednesday featured a return to the strong gains that Nasdaq investors have grown accustomed to seeing, even as the rest of the market took a pause. Here's why the Nasdaq is doing so well on Wednesday and what it means for the rest of 2020 and beyond.
Investors hedge their bets
A big part of the pessimism among Nasdaq investors in recent days has been the assumption that much of the index's gains have been attributable to growth stocks that capitalized on new opportunities brought on by the COVID-19 pandemic. Specifically, stay-at-home tech stocks have been huge winners in 2020, and investors seemed ready to take profits as soon as news of a possible coronavirus vaccine came out earlier this week.
Yet today, investors look like they're taking a more realistic view of the situation. Even if a vaccine proves to be effective, it'll still take months to navigate accelerated approval procedures and get it distributed to the public at large. During that time, public health officials are worried that a massive surge in COVID-19 cases could prompt a return to shutdowns and other more extreme measures to control the spread of the disease.
More than just stay-at-home stocks
More importantly, the assumption that Nasdaq strength has come only from stay-at-home trends is incorrect. The trend toward corporate adoption of technological advances was already well established long before the coronavirus crisis began, and the end of COVID-19 won't halt those digital adoption efforts.
Just looking at top stocks in the Nasdaq-100 Index, it's hard to argue that the prospects for Apple, Microsoft, and Facebook hinge on what happens with the coronavirus. Even e-commerce giant Amazon.com will have plenty of opportunities to grow even once shoppers everywhere can feel safe returning to malls and other stores.
Be ready for volatility
Nevertheless, with such high expectations for many stocks, investors have to be ready for big drops. That's what happened with data analytics company Datadog (NASDAQ:DDOG), as a solid quarterly report featuring greater than 60% revenue growth year over year and a much better adjusted profit than expected still met with disappointment from shareholders. Datadog was down as much as 14% on Wednesday before recovering some of its lost ground.
In the long run, these violent stock-price fluctuations give way to smoother moves based more heavily on fundamental business performance. That can be almost impossible to see on a day-to-day basis, but if you can be patient, the longer-term trends will assert themselves in time.
The Nasdaq may have dominated the rest of the stock market on Wednesday, but that doesn't mean investors have decided once and for all that tech stocks are the place for high-growth investors to be right now. The lesson to learn today is that what happens one day in the stock market can reverse the next and then move back in the original direction after that. Having a consistent strategy will keep you from getting whipsawed amid all the bumps in the road.