For the first time in 10 months, the Nasdaq Composite (^IXIC -0.52%) has fallen into correction territory.
A correction is defined as a decline of more than 10% from a recent high. After the Nasdaq peaked at a closing high of 16,057.44 on Nov. 19, 2021, it closed at 14,340.25 on Jan. 18, falling 10.7% in just two months. Fears of rising interest after Federal Reserve Chairman Jerome Powell forecast up to three rate hikes this year have spooked investors out of high-priced tech stocks, causing the Nasdaq to fall faster than other major indexes like the Dow Jones Industrial Average and the S&P 500.
Image source: Getty Images.
A 10% sell-off doesn't have a special meaning, but the correction milestone serves as a notice that market sentiment is shifting, especially after the boom over the last two years. A correction is also halfway to a bear market, generally defined as a 20% sell-off from a recent high.
If you're feeling rattled by the Nasdaq correction, here are three simple things you can do right now.
1. Review your holdings
Market shifts and sell-offs are a good opportunity to take a look at your portfolio and review your holdings. Check your investing theses and make sure they are still intact.
Volatility is normal, certainly after the last two years, but there may have been some material news you've overlooked. If you're a Peloton Interactive (PTON -0.97%) shareholder, for example, you might want to rethink your investment after the latest earnings report showed revenue growth slowing to just 6% in the most recent quarter as equipment sales are falling. Similarly, Zillow Group (Z -1.72%) (ZG -1.84%) took a dive after announcing that it was ending its Zillow Offers home-flipping business, which some investors saw as the company's future. And Stitch Fix (SFIX -1.79%) stock plunged back near its initial public offering price after forecasting flat growth in the current quarter, a sign that Stitch Fix Freestyle, its direct buying initiative, is off to a poor start.
Most tech stocks are down simply because market valuations are getting compressed as investors anticipate higher interest rates, but some once-promising stocks have broken along the way.
2. Make a watch list
Sell-offs are often good buying opportunities, and this one is no different. While some stocks are down for good reasons, many have fallen even though their prospects remain strong. It's a good idea to make a watch list of stocks you'd be interested in buying at the right price as stocks could keep falling from here.
A number of adtech stocks look appealing at current prices, including Perion Network (PERI -2.92%) and PubMatic (PUBM -0.14%). That industry has been hammered on fears of a weakening digital ad market due to the removal of third-party cookies and Apple's ad-tracking transparency initiative. However, many of these companies are still growing fast even though they aren't priced that way. Perion is trading at a price-to-earnings ratio of just 20 based on this year's expected earnings per share (EPS) even though the company expects revenue to grow 29% in 2022. Pubmatic, meanwhile, trades at a P/E ratio of 35 even though it's on track to grow revenue 52% in 2021.
Another high-growth stock that may be too cheap to ignore is consumer lending technology specialist Upstart Holdings (UPST -0.58%), which is trading at a P/E of 50 with revenue expected to grow 50% next year.
And e-commerce stocks are also falling into the bargain bin as the market expects the pandemic-fueled growth in online retail to fade. Carparts.com (PRTS -1.53%), an online disruptor in the auto parts industry, looks intriguing at a price-to-sales ratio of just 0.8, a low price for a company targeting long-term revenue growth of 20% to 25% a year.
3. It might be nothing
A correction isn't necessarily a cause for alarm. The Nasdaq has fallen 10% from its peak 66 times since the index was founded in 1971. It's a pretty regular occurrence, happening more than once a year on average.
It's also worth remembering what happened during the last two Nasdaq corrections. The tech-heavy index briefly dipped into a correction on March 8, 2021, but then came roaring back. The one before then came in February 2020 as stocks crashed on fears of the coronavirus. After a record plunge in just a month, stocks were back at all-time highs by August with tech stocks the biggest winners.
In investing, doing nothing is often a wiser strategy than it seems. If you're confident in your stocks' long-term growth potential, then there's no need to make a move just because the market is volatile. Doing nothing can be the simplest and most direct path to success in investing.
