The U.S. NASDAQ Composite Index officially entered a correction last week, dipping 10.4% from its start-of-the-year level by the lows on Thursday. While the index regained some of the lost ground on Friday, it remained near correction territory, down 8% at the close of trading that day.
Lately, there have been some signs that cooler heads are beginning to prevail. Friday’s trading was fairly orderly, and as of this writing, Monday futures were pointing to a flat open for the S&P 500. The extreme volatility of last week appears to have peaked, maybe even passed.
Nevertheless, there is reason to think that the volatility could start up again. The U.S. tech sector remains historically pricey, with the Magnificent Seven stocks trading at about 50 times earnings. Additionally, Donald Trump is now in the White House and is fighting trade wars with Canada, Mexico, China, and the E.U. simultaneously — all while uttering threats against Taiwan and Japan. The possibility of a dip can’t be discounted. In this article, I will explain the tech correction we just witnessed and take stock of the broader market.
Source: Getty Images
U.S. tech down 10.4%
From the beginning of the year to last Thursday’s lows, the NASDAQ Composite declined 10.4%. The index declined 13.6% from the top tick of the last 12 months to the bottom. By both definitions, it entered a correction. The S&P 500, which is less heavily weighted in tech, fared somewhat better.
S&P down 4% for the year
The S&P 500 declined 10.13% from the 52-week high to last week’s low. It declined 6% from the beginning of the year to the low. It was less volatile than tech because tech has been leading this correction. So, the S&P 500 was only briefly in a correction and was down only 6% at the low from the start of the year (which is now down to 4%).
Will they go down further?
As for whether the U.S. markets will go down further…
I suspect that the tech stocks, at least, will. Those stocks were at unprecedentedly steep valuations before the year started. As for the U.S. markets as a whole, those could be surprisingly okay. There is a lot of non-tech as well as tech in the S&P 500, and plenty of energy, utilities and financial names remain cheap.
Canadian alternatives to pricey U.S. stocks
If you are concerned about the U.S. markets being potentially overvalued, you could look into Canadian stocks as alternatives. They are usually cheaper than those in the United States.
Consider Alimentation Couce-Tard (TSX:ATD). Trading at 16.6 times earnings, it is far cheaper than your typical U.S. tech stock. Despite the cheapness, it is quite profitable, with a 17% gross profit margin and a 20% return on equity. It sells gasoline, so it benefits whenever oil prices go up. And finally, it has done steady, if not explosive, growth over the years. Alimentation is a well-run, sensibly managed Canadian company. It could be a great alternative to the extremely pricey U.S. tech stocks that have gotten too popular in recent years. And, of course, investing in it would be a great example of “buying Canadian!”
