With investment jitters on Wall Street sending stocks sliding during the past month, the Nasdaq composite on Monday entered into an official correction – defined as a drop of 10 percent or more from the most recent high in a generally rising market.
The Nasdaq, which had been a market leader before its recent drop, declined by 2.05 percent Monday. That places the technology-rich index down 10.8 percent since its most recent high on May 8.
Two key economic reports – the Producer Price Index, due out today, and the Consumer Price Index, due out Wednesday – could provide guidance to investors, said Fred Taylor of Denver- based Northstar Investment Advisors.
Taylor said if the reports show “inflation is rearing its ugly head,” stocks “will be volatile.”
The decline marks the first time the Nasdaq has logged a correction since May 2005, according to MarketHistory.com, which tracks the stock market’s historical performance.
A bear market is defined as a drop of 20 percent or more from the most recent high.
Two other benchmark indexes have not dropped as severely.
The Dow Jones industrial average declined 0.91 percent Monday, off 7.3 percent since its 2006 high on May 10. The broader Standard & Poor’s 500 fell 1.27 percent Monday, down 6.7 percent from its yearly high May 5.
Market corrections often hurt smallish stocks and technology companies – such as the ones traded on Nasdaq – more so than larger, dividend-paying stocks, said Gibbons Burke, editor of MarketHistory.com.
Among the worst-performing Nasdaq-member companies based in Colorado this year are A4S Security Inc. (down 43 percent), Evolving Systems Inc. (down 35 percent) and Health Grades Inc. (down 34 percent).
Some larger Colorado-based companies on the Nasdaq have fared better: Level 3 Communications (up 56 percent), EchoStar Communications Corp. (up 12 percent) and Liberty Global Inc. (up 4 percent).
Burke said history suggests the Nasdaq composite could soon bounce back. His data analysis shows:
The Nasdaq has logged 24 official corrections since its inception in 1971. Of those, it has rebounded 15 times by an average of 14.3 percent during the next 100 trading days. Following the other nine corrections, the index declined by 7.1 percent on average.
A rebound is even more likely when a correction occurs during June. Of the Nasdaq’s five corrections that occurred in June, the composite has rebounded in all cases, gaining 9 percent on average.
History aside, the sell-off could offer investors bargains, said Bob Straus, chief investment officer at Icon Advisers.
“We are seeing value across the market,” said Straus, whose Greenwood Village-based company uses mathematical models to pick stocks. “This (decline) is more based on fear and emotion than fundamentals.”
Straus said Icon’s research suggests the market is undervalued by at least 18 percent. He said fears about inflation have already been priced into stocks.
Staff writer Will Shanley can be reached at 303-820-1260 or wshanley@denverpost.com.
