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People are calling this a correction... I don't understand the first thing about economics. Over the last quarter, the Nasdaq is down 25%. That's a correction?

by warent 4y ago

People are calling this a correction... I don't understand the first thing about economics. Over the last quarter, the Nasdaq is down 25%. That's a correction? Seems pretty serious

francisofascii 4y ago
And the Nasdaq is still up 116% over the last five years. So some would argue, that yes, it was and maybe still is overvalued.
ticviking 4y ago
Ultimately probably. There's a lot of "value" that isn't linked to any work someone is actually doing. Eventually the price of companies depending on that illusion has to come down to reflect the reality.
lumost 4y ago
People have called Tech bubbles since 2012, There have been at least 2-3 similar sell-offs over the last decade that simply lead to higher tech valuations within a year or two. Hence the term "correction" is used, this also helps assuage nervous retail investors that another '01 or '08 crash isn't around the corner. The difference between then and now is that interest rates are blasting through the roof along with inflation. The underlying question that CEO's need to think through is whether this is a long-term shift in the funding environment, or a short-term blip. If the latter, actually taking the foot off the gas instead of saying that you will could lead to missed growth relative to competitors. Now, in the event that its a long-term shift - there will certainly be firms who run into the wall from not taking their foot off the gas.
- __alexs 4y ago
  > The difference between then and now is that interest rates are blasting through the roof along with inflation. The effective federal interest rate is 0.33% today. It was 2.4% before COVID...
  - dgfitz 4y ago
    > The effective federal interest rate is 0.33% today. It was 2.4% before COVID... I believe it is actually over double that and sits around 0.84 https://www.newyorkfed.org/markets/reference-rates/effr https://www.newyorkfed.org/markets/reference-rates/effr
  - lumost 4y ago
    The absolute number doesn’t matter so much as the change. If valuations rose because interest rates fell, then rising interest rates will do the opposite
  - missedthecue 4y ago
    Look at the average mortgage rate...
  - ffggvv 4y ago
    The current fed funds rate is 1% (0.75-1.0) the next 2 meetings they plan to raise it by 0.5 each meeting. and then 0.25 each meeting after that until inflation is gone. in 2019 they started lowering it because they crashed the market by raising it to 2.5. which proves the point trajectory matters alot.
    - lumost 4y ago
      Unless we believe in magic monetary fairy dust, it’s reasonable to assume that the fed cannot wish economic growth into existence. Without real growth, we cannot have wage increases and asset price increases - one must take from the other. So far the fed has chosen asset appreciation over wage increases, we’ll see how things play out this cycle.
nonameiguess 4y ago
It's not, actually. People are just using the wrong term. Finance uses "correction" to mean an at least 10% but not 20% index drawback, with the correction period lasting until a new high is reached. When an index declines by 20%, they call that a bear market. It's just colloquial usage not matching the industry jargon.
khyryk 4y ago
Because over the last 3 years just prior to this correction, QQQ (since we're talking about the tech sector here) had a CAGR of around 30%. Had it been climbing up at a CAGR of 10%, we'd be having a different conversation.

by warent 4y ago

People are calling this a correction... I don't understand the first thing about economics. Over the last quarter, the Nasdaq is down 25%. That's a correction? Seems pretty serious

francisofascii 4y ago

And the Nasdaq is still up 116% over the last five years. So some would argue, that yes, it was and maybe still is overvalued.

ticviking 4y ago

Ultimately probably. There's a lot of "value" that isn't linked to any work someone is actually doing. Eventually the price of companies depending on that illusion has to come down to reflect the reality.

lumost 4y ago

People have called Tech bubbles since 2012, There have been at least 2-3 similar sell-offs over the last decade that simply lead to higher tech valuations within a year or two. Hence the term "correction" is used, this also helps assuage nervous retail investors that another '01 or '08 crash isn't around the corner. The difference between then and now is that interest rates are blasting through the roof along with inflation. The underlying question that CEO's need to think through is whether this is a long-term shift in the funding environment, or a short-term blip. If the latter, actually taking the foot off the gas instead of saying that you will could lead to missed growth relative to competitors. Now, in the event that its a long-term shift - there will certainly be firms who run into the wall from not taking their foot off the gas.

__alexs 4y ago
> The difference between then and now is that interest rates are blasting through the roof along with inflation. The effective federal interest rate is 0.33% today. It was 2.4% before COVID...
- dgfitz 4y ago
  > The effective federal interest rate is 0.33% today. It was 2.4% before COVID... I believe it is actually over double that and sits around 0.84 https://www.newyorkfed.org/markets/reference-rates/effr https://www.newyorkfed.org/markets/reference-rates/effr
- lumost 4y ago
  The absolute number doesn’t matter so much as the change. If valuations rose because interest rates fell, then rising interest rates will do the opposite
- missedthecue 4y ago
  Look at the average mortgage rate...
- ffggvv 4y ago
  The current fed funds rate is 1% (0.75-1.0) the next 2 meetings they plan to raise it by 0.5 each meeting. and then 0.25 each meeting after that until inflation is gone. in 2019 they started lowering it because they crashed the market by raising it to 2.5. which proves the point trajectory matters alot.
  - lumost 4y ago
    Unless we believe in magic monetary fairy dust, it’s reasonable to assume that the fed cannot wish economic growth into existence. Without real growth, we cannot have wage increases and asset price increases - one must take from the other. So far the fed has chosen asset appreciation over wage increases, we’ll see how things play out this cycle.

nonameiguess 4y ago

It's not, actually. People are just using the wrong term. Finance uses "correction" to mean an at least 10% but not 20% index drawback, with the correction period lasting until a new high is reached. When an index declines by 20%, they call that a bear market. It's just colloquial usage not matching the industry jargon.

khyryk 4y ago

Because over the last 3 years just prior to this correction, QQQ (since we're talking about the tech sector here) had a CAGR of around 30%. Had it been climbing up at a CAGR of 10%, we'd be having a different conversation.