Correct

Tech stocks move toward “correction” territory: we break it down

Monday, March 8, 2021 by Robinhood Snacks |

Do you remember?... the 21st of December (cue: Earth, Wind, and Fire jam). Back then: the stock market was hitting record highs left and right, and tech stocks were leading the charge. After peaking in mid-February, markets have fallen back to around December levels. Tech stocks got hit especially hard: the tech-heavy Nasdaq index is down 8% from its February 12th peak, and is up less than 2% for the year (after being up 11% at its high).

  • Tech stocks are near “correction” territory: A drop of 10% or more from the most recent high. Corrections can hit assets (like stocks), indexes (like the Nasdaq), or entire markets. On Friday, the Nasdaq briefly hit a correction, when it was down 12% since Feb. 12.
  • Big Tech influences the whole market, which is reflected in the S&P 500 index. On Feb. 12: Apple, Microsoft, Amazon, Tesla, and Facebook made up a whopping 21% of the S&P 500’s value.
  • BTW: If the market falls 20% below its recent peak, it turns from a correction into a “bear market.” We saw that happen from February to March of last year, when Covid hit.

Why it's going down... Some investors think the tech sector is overvalued. Rising interest rates and inflation fears are also a huge part of it. Some worry that the Fed will raise interest rates to curb potential inflation, despite Jerome Powell saying (multiple times) that it’s unlikely to happen soon. To see why higher interest rates can be bad for stocks, check out our explainer.

  • Combine these with the vaccine rollout and economic recovery, and you’ll see why stocks that were crushing it mid-pandemic are falling now.
  • A few examples: Peloton, Zoom, Square, and Teladoc are all down over 20% since February’s peak.
THE TAKEAWAY

Corrections are normal... For long-term investors, a correction can be like a small dip in the hill toward reaching investing goals. Historically, the market has recovered from corrections (though some took longer than others). While they might be painful short-term, corrections can help "correct" the prices of overvalued stocks. Markets were frothy at their peak — a correction is kind of like a barista skimming off foam. In the past, they've been followed by periods of growth. The US stock market has had more than 25 corrections since WWII.