Since the start of 2019, record-closing highs for Wall Street’s major indexes have become almost commonplace. With the exception of the five-week COVID-19 crash in February-March 2020 and the nine-month bear market in 2022, the bulls have ruled the roost. But this dynamic may be coming to an end.
As of the closing bell on March 26, the tech-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) is officially in correction territory (down 10.7% from its all-time closing high). The iconic Dow Jones Industrial Average (DJINDICES: ^DJI) and benchmark S&P 500 (SNPINDEX: ^GSPC) are on its heels, with respective pullbacks of 8.4% and 7.1% from their record-closing highs.
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With volatility picking up on Wall Street, here are three things you should know about the Nasdaq Composite’s correction.
One of the toughest realizations for investors (especially newer investors) is that Wall Street’s major stock indexes often take the stairs up and the elevator down. In other words, the Dow, S&P 500, and Nasdaq Composite rise steadily over long periods, but when things go wrong, emotions can push equities off the proverbial cliff in short order.
The dynamic for the Nasdaq to fall at a faster pace than it rose is arguably in place. While this isn’t an encompassing list, some of the biggest headwinds for Wall Street include:
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Historically pricey valuations, based on the Shiller Price-to-Earnings Ratio
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A significant projected jump in inflation caused by the Iran war
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Ongoing tariff and trade policy uncertainty
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The potential for an artificial intelligence bubble to form and burst
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Historic division within the Federal Open Market Committee
Chances are that things will get worse for the Nasdaq Composite before they get better.
On the other hand, history is quite clear that stock market corrections, bear markets, and crashes are generally short-lived.
Recently, analysts at Bespoke Investment Group published a data set on X (formerly Twitter) that examined the length of every S&P 500 bull and bear market since the start of the Great Depression (September 1929).
Though the S&P 500 is constructed a bit differently from the Nasdaq, they’re both market-cap-weighted indexes that have behaved similarly over the long term.