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Is the Bull Market in High-Growth Nasdaq Stocks Over?

By Dan Caplinger – Nov 23, 2021 at 1:10PM

Key Points

  • The Nasdaq kept underperforming other markets on Tuesday.
  • Some fear that the long bull market for high-growth Nasdaq stocks is over, given recent declines.
  • However, volatility is something investors have to expect for these stocks, and selling prematurely could be the worst move you could make.

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Volatility works in both directions.

Stock markets have turned volatile during the Thanksgiving holiday week, and that's created a rift on Wall Street. Although some major benchmarks are holding up well, the Nasdaq Composite (^IXIC) has been down fairly sharply for two days in a row. Just before noon ET on Tuesday, the Nasdaq was down more than 1%, bringing its two-day drop to more than 350 points.

Looking more closely within the Nasdaq, many of the up-and-coming high-growth companies that have performed so well over the past couple of years are coming under substantial pressure, with outsized declines that seem out of proportion to any fundamental news. Yet investors in those stocks have seen firsthand just how volatile they can be in producing massive returns, so it's only natural that the inevitable pullbacks these stocks experience will also be gut-wrenching in their magnitude.

Yet it's also human nature to wonder if perhaps the bull market in these high-growth Nasdaq stocks might finally have come to an end.

Person at desk with head in hands, with screens showing stock charts.

Image source: Getty Images.

A tough day for big growth

Many promising companies on the Nasdaq saw their shares hit an air pocket Tuesday. Monday afternoon's earnings results from Zoom Video Communications (ZM 9.85%) sent that stock down 18%, falling below the $200 per-share mark for the first time since the first half of 2020. Zoom shares are now off more than 60% from their all-time highs.

Even without news directly affecting companies, many of Zoom's high-growth peers took considerable hits, as well. Among them:

  • Cybersecurity-specialist CrowdStrike Holdings (CRWD 4.72%) was down more than 5% Tuesday morning, bringing its losses over the past month to nearly 20%.
  • Fintech-disruptor Upstart Holdings (UPST -2.57%) was down about 8%, sending its stock down 43% since late October.
  • Delivery-specialist DoorDash (DASH 0.57%) gave up 9%, giving back all of its gains from the past couple of weeks and then some.
  • Interactive fitness company Peloton Interactive (PTON -0.19%) fell another 6%, hitting a new 18-month low, down more than 75% from its highest levels less than a year ago.

Even some stocks that have held up well until now found themselves on the list of losers, including cloud-specialist DigitalOcean Holdings (DOCN 2.05%) falling 6% and Datadog (DDOG 4.37%) moving lower by 3%.

Why it's premature to call the end of the bull market

The challenge in investing in high-growth stocks is that investors always face difficulties deciding when a bull market has come to an end. When a stock generates 100%, 200%, or even 500% returns in a short period of time, even a pullback of 30%, 40%, or 50% can represent merely a correction in a longer-term upward trajectory. Selling out after those pullbacks because you think greater declines are coming has often proved to be the worst possible move you could make.

Moreover, the current level of volatility in high-growth stocks should not take anyone by surprise. By their nature, high-growth stocks are more susceptible to big market swings because most of their potential is in the future and therefore subject to greater uncertainty. This can lead to painful losses, but it's also the source of the outsized gains seen over the past 18 months for many of these stocks.

Focus on fundamentals

The smart move for long-term investors is to keep your eyes squarely on the business prospects for the companies whose stock you own. Some companies do see fundamental challenges that change the investing proposition and make them less attractive. In that case, considering a sale can be the right move.

More often than not, though, share-price moves are noise with little relation to the fundamental factors that make them promising businesses. The more you can tune out distractions and stay focused on business success, the more likely it is that you'll boost your long-term investment performance.

Dan Caplinger owns shares of Datadog, Peloton Interactive, and Zoom Video Communications. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Datadog, Digitalocean Holdings, Inc., Peloton Interactive, Upstart Holdings, Inc., and Zoom Video Communications. The Motley Fool has a disclosure policy.

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