The Nasdaq Composite is a stock market index that measures the performance of over 3,600 companies, many of which fall into the technology and consumer discretionary sectors. In fact, tech companies alone account for 48% of the index's weight, and because tech is often synonymous with growth, the Nasdaq Composite is essentially a benchmark for growth stocks.
That quality has been a blessing and a curse. Growth stocks often perform very well during periods of economic expansion, but they usually perform very poorly during periods of contraction. That happens because growth stocks are valued on future revenue and earnings potential, and that potential is heightened during periods of prosperity but reduced during periods of economic hardship.
Investors learned that lesson the hard way last year. The Nasdaq Composite plunged 33% in 2022 as red-hot inflation and rising interest rates threatened to tip the economy into a recession. The index has only suffered a sharper decline on three occasions since it was created in 1971.
Here's what investors should know.
Data by YCharts.
Historical data can shed light on the future
The Nasdaq Composite has fallen by more than 33% only three times in history: 1974, 2000, and 2008. Here is a brief overview of each downturn.
1974: The Nasdaq dropped 35% in 1974, though the downturn started a year earlier. After peaking in Jan. 1973, rampant inflation and gasoline shortages sent the tech-heavy index into a free fall. It plunged 59% before reaching a bottom in Sept. 1974, but the Nasdaq did not achieve a new high until four years later.
2000: The Nasdaq dropped 39% in 2000 as the dot-com bubble triggered a particularly devastating downturn. After peaking in March 2000, the Nasdaq fell 77% before reaching a bottom in Sept. 2002. At that point, the index started to recover, but it failed to reach a new high before the financial crisis of 2008 triggered another market crash.
2008: The Nasdaq Composite dropped 40% in 2008 as the U.S. economy collapsed under the weight of the Great Recession. The index reached a bottom in March 2009, and it took more than six years for the Nasdaq to hit a new high in May 2015.
There are two particularly important lessons buried in that information. First, despite suffering several catastrophic crashes, the Nasdaq Composite has recovered from every past downturn. Second, all of those downturns proved to be incredible buying opportunities.
For instance, the Nasdaq Composite has climbed about 790% since Sept. 2002, or 11.4% on an annualized basis. That means $10,000 invested in a Nasdaq Composite index fund in Sept. 2002 would be worth more than $89,000 today.
Of course, it is impossible to time the bottom of a market crash, so the best strategy is to invest small sums of money on a regular basis. The Nasdaq Composite has produced an annualized return of 10.6% over the last 20 years. At that pace, $100 invested on a weekly basis would worth $315,000 two decades from now.
How to take advantage of the buying opportunity
Smart investors know a market downturn is a buying opportunity, but there are different ways to take advantage of the current situation. Investors looking to keep things simple should consider buying an index fund like the Fidelity Nasdaq Composite ETF (ONEQ -0.74%). It tracks the performance of the Nasdaq Composite, and as discussed in the previous section, the tech-heavy index has generated impressive returns over long periods of time.
Alternatively, investors willing to do a little homework should consider buying individual stocks, and Amazon is a particularly compelling investment idea right now. Amazon runs the most-visited e-commerce marketplace in the world, dominates the cloud computing industry, and is rapidly gaining share in digital advertising. In other words, Amazon has a strong presence in three large and growing markets, yet the stock trades at 1.7 times sales, its cheapest valuation in the last five years.
