It was bound to happen sooner or later.
Like Icarus flying too high too fast only to have the sun melt the wax holding his wings together, the share market correction we're witnessing right now was inevitable.
Only the timing was in doubt. And we're happy to leave trying to time the share market highs and lows to those with a penchant for gambling and far deeper pockets than ours.
Unlike Icarus, though, global share markets aren't in a death spiral. The wings – if we can stretch the analogy – are still firmly in place.
Namely: record low interest rates for the foreseeable future; trillions of dollars in new fiscal stimulus projects in the pipeline across the developed world; plenty more quantitative easing (QE) ahead from the central banks; cashed up retail and institutional investors still waiting on the sidelines (Warren Buffett's Berkshire Hathaway alone was sitting on some US$150 billion (AU$208 billion) in cash at the end of June). And let's not forget the host of quality listed companies creating real world value with their businesses.
Nonetheless, the blistering pace of the technology led share market rebound since March 23 was due for a pullback.
The share price retrace we had to have
The NASDAQ-100 Index (NASDAQ: NDX) – containing the biggest 100 tech-oriented shares of the broader Nasdaq Composite Index (NASDAQ: .IXIC) – gained 77% from 23 March through to its all-time highs last Wednesday, 2 September.
Following yesterday's (overnight Aussie time) 4.8% loss, the Nasdaq-100 is now down almost 11% since that high. Some of the index's biggest companies, the same ones who helped drive the 77% gains in less than 6 months, are now pulling it lower.
The Apple Inc. (NASDAQ: AAPL) share price fell 6.7% yesterday. It's now 16% below its record highs from last Tuesday, 1 September. That's seen its market cap drop below the much touted US$2 trillion mark.
The Tesla Inc (NASDAQ: TSLA) share price has fared even worse, shedding a gut-wrenching 21% yesterday. Its now down 34% from it 31 August all-time highs.
It's a similar story here in Australia
The S&P/ASX All Technology Index (ASX: XTX) tracks 50 of Australia's leading and emerging technology shares. On 25 August, XTX had gained a whopping 116% from the 23 March low. Since that high it's down 10%.
Like the Nasdaq 100, XTX is being pulled lower by some of the same big names that drove it higher.
Buy now, pay later star Afterpay Ltd's (ASX: APT) share price rocketed an astounding 939% from 23 March through 25 August. Since then the share price is down 23%.
But Afterpay has nothing on its smaller rival Sezzle Inc (ASX: SZL). Sezzle's share price gained 2,965% from 23 March through its record high on 28 August. Since then the share price is down 40%.
Now let's put these daunting losses into some perspective.
Putting the correction in perspective
Investors who piled into shares, particularly tech shares, over the past 2 weeks will certainly be feeling the burn.
Which is a handy reminder of why we Fools recommend dollar cost-averaging (DCA), and not investing all your funds in one go. This helps you to diversify your investment funds across time as well as across a broader basket of shares, cash, bonds and perhaps an allocation to precious metals.
But getting back to perspective, it's important to take a step back to see the bigger picture, which gives us a good indication of how things may unfold in the longer-term going forward.
So here's the bigger picture, sticking with the 4 shares we've highlighted today.
Year-to-date Sezzle's share price is up 315%, Afterpay's share price is up 137%, Tesla's share price is up 284% and Apple's share price is up 50%. And that's from 2 January, mind you, not the 23 March lows following the COVID-19 market rout.
With that said, is today a good day to buy these and other tech shares that are currently still falling? Probably not. But that time is coming again, likely quite soon. And when it does you won't want to miss out on the next big share price booms.
What the market veterans are saying about the current selloff
Tom Essaye, is a former Merrill Lynch trader and founder of The Sevens Report newsletter. He sounds a note of caution for the short term (as quoted by Bloomberg):
Some froth has come off the market which is a good thing, but keep in mind that we still remain well over levels that could be considered 'fair value' in stocks. And while the outlook for stocks remains generally constructive long term, there's a lot more downside in this market if we get any major disappointments.
Peter Chatwell, head of multi-asset strategy at Mizuho International Plc. adds, "The path of least resistance for the market may well be to test the downside. Ultimately, if there is more selloff, I suspect real money investors will take the opportunity to buy the dip."
