NASDAQ enters bear market: Reasons behind the fall, and what you should do now
NASDAQ has fallen 5.75% in the last five trading sessions. It closed lower for the fourth consecutive day on Tuesday. With yesterday's closure, NASDAQ has confirmed a bear market. Last month, we covered an article that the S&P 500 had entered the correction phase. Let us understand these terms first before talking about the recent developments.
What is a correction?
Correction is a moderate decline in the value of a market index. A general agreement is that if the market drops more than 10% (closes 10% lower) in value from a recent peak, it is considered a correction. Corrections are common in any market, including the US market. Since World War 2, there have been 27 corrections with an average fall of 13.7%. Correction is usually short-term and may last a few weeks to a few months. However, in some cases, the market slips further and turns into a bear market.
What is a bear market?
When a correction deepens and the market value falls by more than 20% from its recent high, the market is said to enter a bear market. The bear market on average lasts for 14 to 16 months and is longer than a typical correction.
NASDAQ enters bear market
The ban on oil imports from Russia has sent the crude prices soaring, and the increasing rise is causing inflation worries. NASDAQ made a high in November, and on Tuesday, it went down by 20.1% from its November high. With this, the tech-heavy index has entered a bear market. Post the March 2020 crash, it is the first time the index has entered the bear market.
The reason for the fall
- oil prices have touched $140 per barrel and are at their highest level since 2008. The reason for rising prices is the banning of Russian oil imports.
- The increase in oil price has led to concerns about higher inflation which is already at 40 years high.
- The gas prices in the US have already hit their highest since 2008, averaging $4.06 per gallon, according to AAA. The highest average on record was $4.11 in July 2008.
- The Federal Reserve is expected to announce the rate hike next week, and it is never a positive sign for the equity market.
- b) Tech-heavy Nasdaq has been hit on fears that higher interest rates will continue to eat away at valuations that are based on profits expected to be delivered far into the future.
How are other major US indexes doing?
The Dow Jones Industrial Average has entered a correction zone as it is down 10.8% from its January 4 peak (Monday closure).
The S&P 500 index has already fallen more than 13% from its peak and entered the correction phase in the last week of February.
What should investors do?
It is impossible to tell how much more the market will fall or where the bottom lies but overall, the market looks reasonably priced. For investors who invest or plan to invest in US stocks, most stocks look attractive. Investors can make investments in them through SIPs over the next few years.
Investors should continue to monitor rising inflation and slowing economic growth as these are two essential parameters that will decide the market's direction in the coming months.