What happened
The market correction may have finally arrived on Tuesday, when the Nasdaq Composite Index first fell 4% in early trading, then began climbing out of its hole -- only to fail and fall back again. As of 1:15 p.m. EST, the tech-heavy index is down 2%, while individual tech stocks are doing worse -- and in some cases much worse.
At last report, shares of security software maker BlackBerry (BB 1.09%) are down 4%, for example, but education software maker 2U (TWOU -3.95%) and cloud customer relationship software maker LivePerson (LPSN -4.22%) are both down more than 11%.
Image source: Getty Images.
So what
What's all the fuss about? Analysts are warning that a "risk cluster" involving Tesla, Bitcoin, and ARK Investment has formed in the stock market, in which richly valued companies, and stock funds that invest in these companies, are simultaneously adding even more risk to their balance sheets by investing in contentious asset classes such as Bitcoin. At the same time, media report that interest rates on government bonds are on the rise.
On the one hand, rising rates may sound like good news for savers. On the other hand, though, because bonds are often thought of as "risk-free" investments, the prospect of getting better returns without risk tends to make investors less inclined to reach for yield by buying stocks -- and risky, richly priced stocks in particular.
With shares of BlackBerry, 2U, and LivePerson all having roughly doubled over the past year of pandemic, that may be worrying shareholders in these stocks.
Now what
How worried should investors be? Testifying before Congress this morning, Fed Chairman Jerome Powell said it will probably be "some time" before the economy is strong enough that the Fed will feel confident scaling back bond purchases. So long as the Fed keeps buying, bond rates should remain low, and investors can be expected to keep reaching for yield -- i.e., keep buying stocks instead of bonds. That's the good news for stock investors.
The bad news is that bond rates aren't the only thing to worry about. Powell also warned of "upward pressure on prices," and an economic recovery that has "slowed substantially." He also fears "echoes" of the 2020 pandemic returning later in 2021, further damaging the economy.
As the Fed Chairman put it: "We've got to finish the job with the pandemic, get it under control" before the economy can be considered completely out of the woods -- and I think that's one thing we can all agree on.
