The Nasdaq Composite Just Had One of Its Worst Years In History. Here's What Usually Happens Next

The Nasdaq Composite is a market index that tracks over 3,600 companies, all of which are listed on the Nasdaq Stock Market, the second-largest exchange in the world in terms of market capitalization. The index is heavily weighted toward the technology sector, so the Nasdaq is commonly viewed as a benchmark for technology stocks, especially high-growth technology stocks.

Of course, many stocks that fit that description performed quite poorly last year, as investors turned bearish in response to red-hot inflation and rising interest rates. That caused the Nasdaq Composite to tumble 33.1% in 2022, marking the index's fourth-worst decline since it was created in 1971.

Here's what investors should know.

Image source: Getty Images.

What history says about a Nasdaq Composite rebound in 2023

The Nasdaq Composite has only fallen more sharply than 33.1% three times in history: 1974, 2000, and 2008. Each of those declines was triggered by world events with serious repercussions for the U.S. economy.

In 1974, oil prices quadrupled in response to an OAPEC (Organization of Arab Petroleum Exporting Countries) embargo against the U.S., leading to gasoline shortages and double-digit inflation that peaked above 12%. Those events caused the Nasdaq Composite to fall 35.1%.

In 2000, years of unbridled enthusiasm about the burgeoning internet economy came to an end when the dot-com bubble burst, slashing valuations across the technology sector. That caused the Nasdaq Composite to fall 39.3%.

In 2008, a complicated chain of events led to a global financial crisis. Lax lending practices had saddled subprime borrowers with excessive debt, fueling the creation of a housing bubble. Meanwhile, credit rating agencies failed to raise alarm bells when that debt was bundled into mortgage-backed securities and resold to institutional investors. Inevitably, overextended borrowers defaulted, the housing bubble collapsed, and several financial institutions filed for bankruptcy. Those events caused the Nasdaq Composite to fall 40.5%.

What happened next? The results are somewhat mixed. The Nasdaq Composite rebounded sharply in 1975 and 2009, but the tech-heavy index continued to fall in 2001. The details are provided in the chart below.

Data source: Macrotrends. Chart by Author.

So, will the Nasdaq rebound in 2023? Well, the index produced an average return of 17.5% in 1975, 2001, and 2009, meaning it has typically bounced back in the year following a monumental decline. Additionally, the Nasdaq has only fallen in two or more consecutive years twice in history. It posted back-to-back losses in 1973 and 1974, and it fell for three straight years in 2000, 2001, and 2002. That data suggests that the index could indeed mount a rebound this year.

However, three data points are hardly a trend. Moreover, past performance is never a guarantee of future returns. Investors should bear in mind that every market crash is precipitated by unique circumstances, so it's never smart to speculate on whether stocks will rise or fall in any given year.

The smartest move investors can make right now

There is one more important fact buried in the historical data. The Nasdaq Composite has eventually recovered from every past bear market, regardless of severity or duration, and there is no reason to believe the current drawdown will be any different. In other words, many of the beaten-down stocks that make up the index will eventually rebound, which means the smartest move any investor can make is to keep investing through the bear market.

For instance, shares of The Trade Desk in digital advertising, Microsoft in cloud computing, and CrowdStrike in cybersecurity have declined sharply amid the difficult economic environment. But all three businesses benefit from a durable competitive advantage, and all three stocks are trading at attractive valuations.

Alternatively, for investors looking to do a little less work, the Fidelity Nasdaq Composite ETF is an index fund that tracks the Nasdaq Composite. Buying a share of the Fidelity ETF is like simultaneously investing in all 3,600+ companies that comprise the index.