KEY POINTS

  • Nasdaq led the overall market downward on Thursday, as familiar tech names dropped by as much as 5%-6%.
  • Since the lows of late March, the S&P 500 has climbed more than 55%, while Nasdaq has surged almost 70%.
  • Some analysts think overheated market was due for correction

U.S. stocks plunged Thursday as the tech-heavy Nasdaq was on its way to suffering its first decline in 11 trading sessions. Both the Nasdaq and S&P 500 index had scored a series of all-time closing highs over the past few weeks.

As of 2:45 p.m. ET the Dow Jones Industrial Average was down 791.01 points, or 2.72%, the S&P 500 declined 123.57 points, or 3.45%, and Nasdaq plunged 570.97 points, or 4.74%.

Tech heavyweights Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Google parent Alphabet (GOOG) and Netflix (NFLX) were all down between 5% and 6.5%.

A brief correction was overdue.

Since the lows of late March, the S&P 500 has climbed more than 55%, while Nasdaq has surged almost 70%.

As such, some analysts think investors are consolidating gains in an overheated, overpriced market.

“For tech specifically, the stocks are seeing large percent declines, but this comes after a massive recent rally,” Adam Crisafulli of Vital Knowledge told CNBC. “Tech has been untethered from fundamentals for a while and momentum can work in both directions.”

Frank Cappelleri, executive director at Instinet, wrote in a research note: “While we don’t expect a crash to happen again now, we don’t need new highs to grow every day to keep the uptrend alive either. With the [S&P 500]… having just logged its biggest advance in two months, it’s certainly earned a period of which to digest [recent gains].”

David Bahnsen, chief investment officer at the Bahnsen Group in Newport Beach, California, told International Business Times that Thursday's declines could very well be the start of the inevitable Nasdaq correction, but cautioned that no one has any way of knowing that. 

“So far, the move downward is rather hum-drum and immaterial,” he said. “A pullback in tech stocks right now is understandable. The Nasdaq has advanced [extraordinarily] since March and many [stocks] are at absurd valuations.”

Bahnsen also cautioned there is no dip to buy, that there appears to be no rush to snap up beaten-down equities.

“The dips to buy are in the non-tech names in the financial and energy sectors, which are still down from the COVID-19 ripple effects in [the first quarter],” he said.

David I. Kass, clinical professor of finance at the University of Maryland, characterized Thursday’s drop as “a periodic correction that generally occurs  when equity markets have been rising rapidly.”

“This is especially true for the recent sharp increases by the large tech firms on Nasdaq,” he told IBT.

Arielle O'Shea, investing and retirement specialist at personal finance company NerdWallet, told IBT that tech stocks have been flying high for some time now, helping the market rally to its recent records.

“But the stock market is rarely a straight line up; dips like this are normal,” she said. “Investors should ask themselves if anything has fundamentally changed about the tech stocks they own? If not, it often pays to stay the course.”

Greg McBride, chief financial analyst at Bankrate.com, told IBT that a down day like Thursday, where the market can catch its breath, is “normal and healthy.”

“The stock market has run a long way in a short amount of time, particularly in the technology sector,” he said. “Putting today’s market pullback in context, this takes us all the way back to where we were – wait for it – last Wednesday. Markets go up and down, not just up as we’ve seen lately. Volatility is normal and investors should be braced for more of it as we head closer to the election, and with valuations at high levels.”

Steve H. Hanke, professor of applied economics at Johns Hopkins University in Baltimore, who also served on President Reagan’s Council of Economic Advisers, noted to IB Times that, ironically, Thursday's market move suggests that the market might be “beginning to have less fear of an ongoing pandemic and is beginning to rotate away” from equities that were riding high on that fear.

“It could be the beginning of a Fear of Missing Out (FOMO) on sectors that would benefit from a speedy recovery,” he added.

O’Shea also noted that the volatility of individual stocks highlights the benefits of owning index funds, which offer “broad diversification that helps blunt the impact of sharp drops like the one we’re seeing today."

McBride further pointed out a market correction – whenever one might materialize – is actually often a precursor to further advances.

“Maintain your long-term perspective and if your portfolio is more heavily tilted toward stocks than you intended, take the opportunity to rebalance,” he suggested.

Bill Herrmann, managing partner of asset manager Wilshire Phoenix, told IB Times: “Market breadth is a leading indicator and it’s flashing red. Many leading, mostly large-cap, stocks have begun to trade sideways over the past several weeks and fewer stocks are acting as a buttress to the equities market.”

Herrmann added that the S&P 500 made all-time highs this week in “one of the more unconvincing manners ever.”

The market is being supported by big tech names, he indicated.

“Everything else seems to be in a zone of indecision,” Herrmann warned. “This type of market behavior is not sustainable. In addition, markets are at all-time highs in the midst of probably the worst fundamental backdrop in the last century. I know some speak about this, but I don’t think they truly ‘get it’. It’s likely going to be an extinction-level-event for many businesses.”

Herrmann added that while the stock market could continue rallying, “until there’s more participation, the path of least resistance is down.”

The Apple and Tesla (TSLA) show cannot last forever, he cautioned.

“At some point, markets will bump into a point where buyers run out of steam, and the breadth is indicating that could be very soon,” he concluded.