NASDAQ: What is going on with the market?
The NASDAQ is a stock exchange based in New York City and it is ranked second on the list of stock exchanges by market capitalization of shares traded (the number one is the New York Stock Exchange). The main characteristic of the NASDAQ stock exchange is that all the companies traded there belong to different technological industries.
Since the 2008 crisis, the NASDAQ Composite Index rose more than 1,200%, but the current market crisis has changed that trend. A really deep downtrend started in November 2021 after hitting its maximum and hasn’t stopped since then. From the maximum reached in November 2021, the NASDAQ Index has fallen around 35% as you can see in the chart below.
The important question is why. There are two main reasons, one related to the general market and specific NASDAQ conditions, and the other one related to certain companies that dragged down the rest of the market.
The first reason for this downtrend is related to global markets. During the pandemic crisis, nearly all the countries in the world were forced to monetary expansion in order to sustain their economies. All that money printed led to one of the worst problems an economy can face: inflation. The annual inflation rate in the U.S. went from 0.1% in May 2020 to 9.1% in July 2022 as you can see in the following chart.
During December 2021 the Fed gave the first signs that they were going to start raising rates to fight inflation. In March 2022 the Fed raised the interest rate for the first time in years. The rates have been raised since then after each FOMC meeting as you can see in the chart below.
In addition, the war in Ukraine, another historical event, had its impact on the markets. The start of the war generated a market crash and issues with commodity prices such as petroleum.
So the first reason is environmental, but if we look at other indices like the S&P 500, the average percentage of the price drop is around 22%. Why has the NASDAQ fallen 35% while the S&P 500 dropped by 22% as we can see in the chart below?
The main reason can be deduced from the chart. The more a stock price rises in a bull season, the more it will fall in a bear season, since expansion and contraction are proportional. If we compare both indices, we can see that NASDAQ rose a lot more than S&P 500, so it is also expected to fall more in a contraction phase. However, that is not the only reason, since in the last months some NASDAQ companies have been showing really bad results to investors. There are several cases to analyze, let’s have a look at two.
The first company we need to look at is Meta Platforms, Inc, the owner of Facebook and Instagram. Since its peak of USD 384 in September 2021, the price went down more than 60% to USD 137. The company lost 237.6 billion dollars in just one day. This is a new record in the history of stock markets. That crash in the Meta stock happened after the release of the results related to poor earnings and a decrease in the number of users worldwide. It led investors to doubt Facebook’s business model. Since then, the company has not been able to improve those estimates because the amount of users keeps declining and their competitors like Tik Tok are growing in an outstanding way.
The second company we’d like to review is Netflix, Inc. The stock price sank more than 60% since its peak of November 2021. The drop of the prices occured due to performance issues. On the 21st of January 2022 the stock price sank more than 20% in just one day after the company admitted that their competition was eating into its own growth in its earnings release for the fourth quarter. In April 2022, the stock fell another 35% after showing a loss of over 200,000 subscribers.
The global markets are falling, and NASDAQ is not exception. But, as you can see, the proper risks related to technological companies, plus some bad results and bad decisions, have resulted in the NASDAQ plunging more than other markets like S&P 500. Now the question is: what can we expect for the future?
There is no good news in the near future. The Fed has clearly stated that the interest rates will continue rising. The war in Ukraine is not even near an end, meaning that the general market conditions will remain as they are now or become worse. In particular with tech companies, most eyes are put on the metaverse release that could lead Meta to a new era in social media, and on Tesla and Apple, which are the two companies that despite the crisis are showing pretty good results and estimates. The future is still uncertain and the risk of having more red days is really high.
Despite this, there is good news - nothing falls forever, so the key to success is to be ready for the time when inflation is under control, and a new age of monetary expansion begins.
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