The Nasdaq Composite (NASDAQINDEX: ^IXIC) measures the performance of more than 3,000 companies from the Nasdaq Stock Exchange. The index is commonly seen as a barometer for growth stocks because it is heavily weighted toward the technology sector.
On Friday, Aug. 2, the Nasdaq closed more than 10% below the bull market high of 18,647 it reached in the previous month. That means the index has officially entered correction territory. The sharp, sudden drawdown was brought on by a resurgence in recession fears following a weaker-than-expected jobs report.
Specifically, the U.S. added just 114,000 jobs last month, missing the 179,000 jobs forecast by analysts. Additionally, unemployment rose to 4.3%, its highest level in nearly three years. Those numbers raise concerns about whether the Federal Reserve has waited too long to lower interest rates, a decision that could easily drag the economy into a recession.
What actually happens in the coming weeks and months depends on how the macroeconomic backdrop changes, and what action the Federal Reserve takes at its September meeting. But history says the Nasdaq could rebound sharply.
History says the Nasdaq could surge during the next 12 months
I want to clarify the terms “market correction” and “bear market” before discussing the historical performance of the Nasdaq Composite. A market correction occurs when an index falls at least 10% from a recent bull market high. Some corrections deteriorate into bear markets, meaning the index eventually falls at least 20% from its previous bull market high. Corrections and bear markets end when the index in question reaches a new high.
Neither corrections nor bear markets can be recognized in real time because it generally takes a few weeks for sufficient losses to accumulate. For instance, the current correction started when the Nasdaq reached a high on July 10, but it was not official until the index closed 10% below its high on Aug. 2. For that reason, it is also impossible to differentiate between a correction and bear market when the index in question has declined 10%. The index may recover from there, or it may continue falling.
With that in mind, the Nasdaq has declined at least 10% from a bull market high 11 times in the last 15 years. Three of those events developed into bear markets, while the other eight never progressed beyond the correction stage.
The chart lists the dates on which the Nasdaq first closed more than 10% below its bull market high, and it shows how the index performed over the next 12 months.
|
Nasdaq Closes in Correction Territory |
12-Month Return |
|---|---|
|
May 7, 2010 |
24.8% |
|
Aug. 4, 2011 |
16.1% |
|
May 18, 2012 |
25.9% |
|
Nov. 14, 2012 |
39.6% |
|
Aug. 24, 2015 |
15.3% |
|
Oct. 24, 2018 |
15.2% |
|
June 3, 2019 |
32.1% |
|
Feb. 27, 2020 |
54% |
|
Sept. 8, 2020 |
40.9% |
|
March 8, 2021 |
1.5% |
|
Jan. 19, 2022 |
(24.3%) |
|
Average |
21.9% |
|
Median |
24.8% |
Data source: YCharts.
As shown, after reaching the market correction threshold, the Nasdaq has typically rebounded quickly. Indeed, during the last 15 years, the Nasdaq has returned an average of 21.9% and a median of 24.8% during the 12-month period following its first close in correction territory.
Past performance is never a guarantee of future results, but we can apply those numbers to the current situation to make a somewhat educated guess. Specifically, the Nasdaq closed at 16,776 on Aug. 2, 2024. If this correction aligns precisely with the historical average, the Nasdaq will return between 21.9% and 24.8% during the next year. That means the index will close between 20,450 and 20,936 on Aug. 2, 2025.
However, as of Monday morning at 11 a.m. ET, the Nasdaq has slipped to 16,226. That means the implied upside now ranges from 26% to 29% by Aug. 2, 2025.
Here’s the bottom line: History says the Nasdaq could rebound sharply in the coming months. But even if that doesn’t happen, investors can rest assured that the technology-heavy index will eventually recoup its losses. The Nasdaq has never failed to rebound from any drawdown since it was created in 1971.
In that context, now is a good time for patient investors to purchase stocks, especially stocks in the technology sector. To quote Warren Buffett, “The best chance to deploy capital is when things are going down.”
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Nasdaq Just Entered Correction Territory. History Says This Will Happen Next (Hint: It May Surprise Investors). was originally published by The Motley Fool
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