No sector in this bear market has been affected more by technology – and tech stocks, by far, make up the bulk of Nasdaq Composite index. It should come as no surprise, then, that the Nasdaq is down about 25% year-to-date, with the benchmark index in alcohol market for most 2022.
After the Nasdaq bounced back in July, rising 12.4%, it pulled back again in August, down 4.6%, and has been heading south so far in September. It is impossible to say with any certainty where the general index will end, but many believe it has not reached the bottom yet, given the high valuations and the macroeconomic environment. Certainly, many investors are wondering if it is safe to invest in the Nasdaq now.
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Is it still overrated?
The question of whether it is safe to invest in NASDAQ depends on risk tolerance, goals, investment horizon, and other personal factors. But in general, there are two types of information that may help you make that decision.
The former may help you determine whether we have, in fact, bottomed or still have a way to go. The main indicator that a bear market has reached a bottom is price-to-earnings (P/E) Ratio. as my colleague Shawn Williams books Lately, bear markets in recent history tend to end at the forward price-to-earnings multiple of Standard & Poor’s 500 It is in the 13-14 range.
As of September 7, the P/E of the S&P 500 is 19.9. With the historical average at around 15.9, this could indicate that the P/E ratio is still above average for the time being. The forward P/E, which is based on earnings expectations over the next 12 months, is around 17.5, which may also indicate that the market may decline.
Another rating metric is the S&P 500’s S&P 500 Dividend Schiller Dividend Ratio. Also known as the cyclically adjusted price-to-earnings ratio (equity ratio), it is based on average inflation-adjusted earnings from the previous ten years. Currently, Schiller’s ratio is 29.5, well above the historical average of approximately 17.
While all of these metrics refer to the S&P 500, not the Nasdaq, the S&P 500 is used because it is more representative of the market as a whole. The average price-to-earnings ratio for the Nasdaq will run a little higher than the S&P 500, but keep an eye on the average price-earnings for both the Nasdaq and S&P 500 as they return to historical levels.
Best long term investment
Another important thing to know is that no major index has produced better long-term returns than the NASDAQ Composite or Nasdaq 100 It is the 100 largest non-financial stocks on the Nasdaq Stock Exchange. Over the past 10 years, as of September 6, the Nasdaq Composite has returned 14.1% year over year, while the S&P 500 has an annualized return of 10.7% and the Dow Jones has an annualized return of 9%.
Going back 20 years, the Nasdaq has an annual return of 11.7%, compared to 7.7% and 6.8% for the S&P 500 and Dow, respectively. The Nasdaq 100 is even better with an annual return of 13.8% for the 20 years through September 7.
There may be better market similarities during the Great Recession. On October 1, 2008, the Nasdaq was down 22% year-to-date at around 2075. From October through the end of 2008, it fell all the way to 1578 and ended the year down 40%. If you had invested in the NASDAQ on October 1, without realizing that it was going to drop another 500 pips, what kind of return would you get? Even with that downturn, the index has posted an annual return of 13% since then, through September 6, 2022.
So, to answer the question, “Is it safe to invest in NASDAQ now?” If you have already invested in an ETF on the NASDAQ, the answer is definitely yes. The bear market will eventually end and in the long run, the Nasdaq has been one of the best investments out there. Selling now will only close out your losses.
If you’re considering a new investment in a Nasdaq-directed fund, you may want to hold off until you start seeing valuations drop a bit more. But in the long run, the NASDAQ is a great investment.
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