Why the Nasdaq Is So Important to Growth Investing

We’ll talk about the Nasdaq in a minute but first, some context.

If you’ve been following the market, you know that there was a big rally after the U.S. Presidential election. And you know that the large-cap S&P 500 went on a tear for a little over a month, running from November 7 (a day before the election) to December 13 and lifting the Index from 2,101 to 2,272. The Dow Jones Industrial Average followed a similar course, streaking from 17,995 to 19,966 in the same period.

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At that point, both indexes hit a wall, with the S&P running sideways and the Dow conducting a headline-making assault on the 20,000 level that went on for six full weeks before it finally broke through. Here’s what the Dow’s rally and battle with 20,000 looked like.

nasdaq1

The action of the S&P, which looked like it was off to the races when it popped up on January 24 and 25, has been especially perplexing to investors. That two-day rally was followed by a two-day correction that pulled it back very nearly to its earlier range. Another rally on February 2 and 3 has the S&P back above its December/January range, but it’s not what I’d call a decisive breakout. Here’s that chart.

sps-daily

But the really interesting outlier during this period of stagnation in most indexes has been the Nasdaq, which ran into similar resistance in late December, but staged a rally as January began that featured seven consecutive days of new highs. And that rally has continued right up to today.

Why is the Nasdaq different? It has a lot to do with the exchange’s origins. Back when the New York Stock Exchange was still the only game in town, the Nasdaq was just a quotation system and didn’t actually trade stocks. As the Nasdaq Stock Market got going, it included lots of stocks that traded as speculative over-the-counter (OTC) issues. But as the Exchange became the first U.S. stock market to start trading online, it attracted a swarm of new tech companies who saw it as a more modern, more dynamic place to list their stocks. Those companies included, Apple, Cisco, Dell, Microsoft and Oracle and a host of others.

You can hear an echo of that period when the little report on the radio after the stock markets close calls the Nasdaq “the tech-heavy Nasdaq.”

The Nasdaq is especially important to growth investors exactly for that reason. The exchange’s heavy weighting toward tech and other “riskier” issues lets investors use it as a barometer of how much risk investors are willing to take on at any one time. If the Dow is leading the market, investors are risk-averse, and growth issues are out of fashion.

But when the Nasdaq leads the way, investors’ risk appetite is keen, and growth investors can ramp up their own risk accordingly. Here’s what the Nasdaq’s outperformance looks like.

nasdaq3

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Paul Goodwin

The Best Stocks on the Planet

Paul Goodwin has been a researcher and writer for over 30 years. His Cabot Emerging Markets Investor will show you the vast profit potential of investing in countries whose economies are growing far faster than that of the U.S.

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