Although it's up from last month's lows, as of Feb. 10, the Nasdaq Composite (^IXIC -0.64%) is still down more than 9% for the year, and 13% below November's record high. Facebook parent Meta Platforms (META -10.56%) and Netflix (NFLX 1.74%) have experienced particularly tough losses, setting a bearish tone for many of the market's other highly watched stocks.
In other words, it's been a rough few weeks.
Veteran investors are at least considering the possibility that this pullback is a buying opportunity. Stocks are never upended permanently. The trick is finding low-priced opportunities when quality stocks reach their lows, and this recent sell-off may have already put a major bottom in place.
Before you decide take the plunge though, there's something you'll want to know.
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A garden-variety correction for the Nasdaq
The 19% pullback the Nasdaq Composite suffered between November's high and January's low is actually pretty standard stuff. It just feels unusual, because it's the first time we've suffered this sort of sell-off since March 2020, when COVID-19 started to spread in earnest in the United States. Before that, data from Dow Jones indicates the composite has actually suffered 64 different corrections -- peak-to-trough pullbacks of at least 10% -- since its inception back in 1971.
Most of those don't go on to turn into bear markets, which are defined as a dip of at least 20% from a high. Dow Jones says that's only happened for about a third of the corrections since the Nasdaq came into existence. Statistically speaking, odds are good we're not going to hit bear market territory.
But still, what if more selling is in the cards? If that is what awaits, don't worry about it too much. It'll end eventually, as all the other ones have.
This advice of course assumes you're a buy-and-hold investor looking through a long-term lens. If you're only looking to plug into a short-term swing, there's still plenty more volatility that might need to be worked out. Some of it could be bearish.
If you're prepared to stomach a few more gut-wrenching pullbacks though, it's better to risk getting in the market here than it is to risk being out of it. Here's why.
Mostly good
There's certainly no shortage of alarming economic news these days. Inflation is rampant, and subsequently, interest rates are poised to begin a lengthy, sizable uptrend. Politicians are mostly preoccupied with midterm elections as well, so there's little reason to hope anyone in Washington, D.C. is going to help anytime soon.
And, as was noted, some of the Nasdaq's stalwarts are running into serious trouble. The aforementioned Meta just reported its first-ever decline in its number of daily users, while Netflix recently warned investors its days of impressive subscriber growth are coming to a close as well. There's just too much new competition out there in the streaming landscape.
Despite all the fresh challenges though, the composite -- and the broad market, for that matter -- has more working for it than against it. Chief among these tailwinds is earnings growth.
Although well aware of the adverse impacts inflation and/or rising interest rates could have on bottom lines, the analyst community is still calling for 2022 earnings growth of around 35% for the Nasdaq 100, which accounts for the vast majority of the composite's total market cap. The index's forward-looking price/earnings ratio is in turn a palatable 24.9, in line with long-term norms.
The index is being bullishly backed by all the right names too. Powerhouses like Apple, Microsoft, and Alphabet are not only still the biggest, most influential constituents of the Nasdaq Composite, but each is projected to produce double-digit earnings growth this year as well. Ditto for other components like Amazon and Tesla -- two more names the market loves to love. Even Netflix and Meta are expected to produce earnings growth again beginning next year, despite their current red flags regarding user growth.
The worst-case scenario still isn't too bad
Never say never, of course. The Nasdaq has been through 10 bear markets since its creation more than 50 years ago. That tally is 11 if you count the (very) temporary sell-off in March 2020. So even if they're rare, they've happened before and will surely happen again.
The thing is, even when a correction marks the beginning of a full-blown bear market that can prove particularly problematic for the market, these soft patches tend to be relatively short-lived. Data from Reuters suggests the average bear market for the Nasdaq lasts about a year, shaving approximately 30% to 40% off the index's peak value.
It sounds awful at first, but for true long-term investors, this sort of stumble just isn't that big of a deal. The market has more than bounced back from these sell-offs every single time one occurred, and the Nasdaq's rebounds tend to be just as brisk as its meltdowns.
The bigger risk here remains not being in the market at all and missing out on the upside you don't think is coming anytime soon. The only timing-minded strategy you may want to consider employing is simply shifting toward stocks that fare better when rates are rising and lightening up on interest rate-sensitive picks. Even then though, don't overthink it.
