Nasdaq enters correction territory
What's the story
The Nasdaq Composite Index has entered correction territory, having fallen over 5% on Thursday. The index is now more than 11% off its all-time high set last month. A correction is defined as a decline of more than 10%, while a bear market starts at a 20% drop from recent highs. Over the past decade, there have been 10 such corrections in the Nasdaq Composite.
Market recovery
Historical recovery patterns
Historically, after the 2025, 2022, 2020, and 2018 corrections, the market witnessed further declines in the month following.
However, except for one instance in 2022, the Nasdaq returned to rally mode after six months.
On average, from the correction bottom over three months later, it gained an average of 9.41% and 17.03% over six months.
Market anomaly
Exception in the system
The January 2022 correction was an exception to the usual market recovery pattern.
The Nasdaq lost another 18.3% over six months and was down 24.3% a year later, making it a unique case in the index's history of corrections and recoveries.
Political influence
Midterm elections impact on market
The recent correction in the Nasdaq was triggered by Democrats winning control of the House and Senate in the midterm elections.
The party also made significant gains in Texas, where Gina Hinojosa won the governorship after campaigning for an immediate moratorium on data center development.
This has led investors to speculate whether tighter state-level restrictions could slow down data center construction, affecting companies linked to AI trade.
Market volatility
Short-term volatility expected
Frank Cappelleri, founder of CappThesis, analyzed past midterm election cycles and found that they usually lead to more short-term volatility.
However, in all but one of the 13 midterm cycles since 1974, the Nasdaq was higher 12 months after the election.
He cautioned that while this trend is promising for long-term investors, it doesn't mean a smooth ride as market fluctuations can be expected in the near term.
Market downturn
Semiconductor sector hit hard
The semiconductor sector has been hit hard by the recent market downturn. The iShares Semiconductor ETF (SOXX) plummeted 12%, its worst day since March 2020.
Major tech companies such as NVIDIA, AMD, Micron, and Qualcomm also suffered losses.
Despite reporting earnings above estimates, Qualcomm's weaker-than-expected outlook disappointed investors, contributing to the stock's decline.