NASDAQ plunges 5%. What next?

Well that was quick. And brutal. But it wasn't unexpected.'It' is the 5.23% fall in the NASDAQ composite index overnight.

crystal ball reflecting NASDAQ stock charts

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Well that was quick.

And brutal.

But it wasn't unexpected.

'It' is the 5.23% fall in the NASDAQ composite index overnight.

Tesla Inc (NASDAQ: TSLA) shares fell 9%. Apple Inc (NASDAQ: AAPL) was down 8%.

Google's parent company, Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), dropped 5%, while Amazon.com, Inc (NASDAQ: AMZN) gave up 4.6%. (I own shares in those two).

ASX futures are down 2% at the time of writing.

As I said, brutal.

But no, not unexpected.

Which is different from 'I predicted it'.

I didn't.

But yesterday, I did send a Slack message to the Investment team. I wrote:

"Google up 4% overnight. I'm officially reinstating #TheReckoning".

#TheReckoning, in case you're wondering, is part-joke, part-serious comment. Tech stocks have been super-hot over the past few months.

In part, completely justified by growing sales and profits, much of it boosted by the economic side-effects of COVID-19.

But some of it is pure P/E expansion. (At least for those companies that actually have earnings!).

Now, we can look at P/E expansions two ways:

1. The market was undervaluing these companies, and the P/E expansion is 'catching up' to reality; or

2. The market was correctly valuing these businesses, and the P/E expansion is the market getting carried away.

Now, as I said, #TheReckoning is partly in jest, too.

Investors have routinely undervalued technology businesses over the past decade.

An inability or unwillingness to see the sort of long-term compounding potential of some of these companies means that share prices have routinely been too low.

After all, I still own my Amazon and Alphabet shares. That's not the action of a sensible investor who thinks they can predict share price falls, is it?

But then, that's an oxymoron in itself.

The sensible investor doesn't try to predict.

Not because the future isn't worth knowing, but because it's just not knowable.

And the degree of difficulty is magnified over shorter time periods.

Believing Amazon will be more valuable in 10 years is one thing.

Imagining I can guess what each zig and zag will look like, between now and then, is something else entirely.

And, of course, to try would be folly.

But it was also folly to expect these companies' shares to go up in an accelerated straight line forever.

Apple shares were up by more than 30% in the last 6 weeks.

Amazon was up 22%.

Tesla had risen 50%.

And, as I said to the team, Google had risen 4% in a single trading session on absolutely no news.

Yes, shares are volatile.

They do often move on no news.

But as they say, once is happenstance, twice is a coincidence, three times is enemy action.

Or, in this case, something that should have investors paying attention.

Hence that comment.

Be careful, though, of people who say 'we needed a pullback'. That's rubbish.

Same with 'we were due for a correction'.

Even worse 'corrections are healthy'.

Either the commentator in question is lazy, or reaching for boilerplate explanations that make no sense.

(Those same people rarely say 'we needed a run-up' or 'we were due for a fast increase'. They're just peddling seemingly comforting cliches.)

Unless those very same people made those comments before the fall, you can assume they're just retro-fitting a convenient narrative.

With all of that said, though, as I said, I'm not surprised.

Remember, too, that your emotions lead you astray.

Does today's 5% fall in Google shares feel painful? You bet.

But after yesterday's 4% rise, I'm barely down 1%, in total, in the last two days.

If Google had dropped 0.5% yesterday and another 0.5% today, I wouldn't be writing these words.

Similarly, after the huge drops overnight, the other tech companies I mentioned are simply up 'hugely' rather than 'phenomenally' over the past 30 trading days.

Kinda puts it in perspective, right?

Today's headlines will shout 'NASDAQ plunges 5%' or similar.

They could (and probably should) equally say: 'NASDAQ up 33% this year'.

Kinda changes the perspective a little, no?

I do think investors, at large, have got ahead of themselves.

Yes, maybe big (and small) tech was undervalued in March and April.

Maybe those share prices deserved to go higher, as investors realised how resilient they were, as a group, in the face of COVID-19.

And, for the record, I do expect the NASDAQ to outperform the broader US market (and probably the ASX) over the next decade.

But not every company.

Not at every price.

When share prices rise, quickly, it's tempting to believe the narrative.

That, somehow, they 'deserve' these higher prices.

So remember Warren Buffett's warning: "You pay a high price for a cheery consensus".

Our market will likely fall, today.

Perhaps by a lot.

If I was a betting man, I'd suggest that our tech sector will bear the brunt — and the higher they've flown, the harder they'll likely drop.

In some cases, today's falls might be a buying opportunity. In others, it'll be the overdue removal of some hot air.

Which makes it a good time to reconsider your portfolio.

Do you really own those shares because you think it's an attractive price for a quality company that is likely to justify its market cap with future performance?

Or do you own it because the shares have been going up, and so you've created a convenient, if flaky, investment thesis to justify it? 

"In the short run, the market is a voting machine…" Lots of votes over the past few months, but probably not many today.

"…But in the long run, it's a weighing machine." Today is a good time to grab the scales, and make sure you're getting what you've paid for.

But remember: on average, even if the market falls hard, today, Australian shares will still be up by more than 35% since the March lows.

Kinda puts it in perspective, doesn't it?

Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Scott Phillips owns shares of Alphabet (C shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Tesla. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Motley Fool Take Stock

Gold piggy bank on top of Australian notes.
Motley Fool Take Stock

No, Treasurer. Leave the Future Fund alone

They just can't leave well enough alone...

Read more »

illustration of three houses with one under a magnifying glass signifying mcgrath share price on watch
Motley Fool Take Stock

The housing problem that's about to get a *lot* worse

.. and a limited time to fix it!

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Motley Fool Take Stock

After all that scandal… a share price high?

Karma isn't real. Sorry.

Read more »

Businessman studying a high technology holographic stock market chart.
Motley Fool Take Stock

Where to invest for 2, 5, 10 and 20 years

How your timeframe should impact your investing.

Read more »

A young boy laughs with his grandpa as he puts a fishing net over his head.
Motley Fool Take Stock

An investing lesson – sort of – well learned

Sometimes, discretion is the better part of valour.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Motley Fool Take Stock

An 'all-time high' investing plan

With the ASX near all-time highs, what's an investor to do?

Read more »

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Motley Fool Take Stock

How should investors respond to US rate cuts?

It was a big cut. How should investors respond?

Read more »

Happy young couple saving money in piggy bank.
Motley Fool Take Stock

The three things that drive your investment returns

Bottom line? Kenny did a great job. But Penny did better.

Read more »