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NASDAQ plunges 5%. What next?

crystal ball reflecting NASDAQ stock charts
Image source: Getty Images

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!

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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.

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