Fast And Furious

Fastest US stock market correction in history

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What's going on?

Hasta la vista, baby: after hitting record highs just last month, the Nasdaq Composite index – dominated by major US tech stocks – crunched into a technical “correction” this week.

What does this mean?

The Nasdaq had jumped 31% last quarter and another 20% since July, reaching its highest level in history (even when adjusting for inflation). But it fell this week into its fastest-ever correction, dropping more than 10% from that recent peak. There’s nothing particularly special about the double-digit decline, beyond the potential indication of investor pessimism. A more worrying – yet unlikely – threshold would be a 20% drop, which heralds a “bear market”.

The correction might’ve been down to investors’ long-predicted “rotation” out of speculative Big Tech stakes and into economic-growth-reliant “cyclical” and cheap-looking “value” stocks (tweet this). Other major US indexes were dragged down too – and tech’s tumble was likely exaggerated by its prior reliance on investors buying optimistic short-term stock options.

Why should I care?

For markets: Dude, where’s my Tesla?

The electric carmaker’s stock – a Nasdaq component – has fallen more than 20% in the last few days. That may be due in part to the recent revelation that its shares won’t yet be included in the most influential American stock index of them all. Some $4.3 trillion is indiscriminately invested in S&P 500 stocks via exchange-traded funds, and the expectation was that Tesla would soon get in on the action. Without that advantageous autopilot, investors – who’ve seen Tesla’s share price rise 300% this year – might’ve been minded to sell down stakes and take some profit.

The bigger picture: No stop signs, speed limit.

US stocks bounced back on Wednesday – though long-term investors probably weren’t surprised. According to learned stock historians, a short, sharp selloff following a steep recovery is par for the course as markets settle back down. And according to analysts at investment bank Morgan Stanley, company earnings are improving more quickly than expected – likely giving stocks another boost.

Originally posted as part of the Finimize daily email.

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