- On 19 January the Nasdaq closed more than 10% below its November high.
- The prospect of rate rises was punishing companies whose value depends on profits arriving many years from now.
- Portfolios concentrated in a single type of asset felt it most: it is worth reviewing the weight of each sector, region and asset.
On 19 January 2022 the Nasdaq index closed more than 10% below its November high. In technical terms, tech stocks were entering a correction after a long period of gains. The prospect of interest rate rises was punishing the companies most dependent on future profits, and the move was felt with particular intensity in that segment of the market. For anyone holding a significant share of their savings in that type of company, the fall was not an abstract figure.
The episode matters because it came after years of almost uninterrupted gains, during which risk seemed distant. A fall of this kind need not foreshadow a crisis, but it reminds investors that market prices change, sometimes quickly, and that it is wise to be clear in advance about what one is prepared to bear and for how long. That conversation is much easier to have before a fall than during one.
What a correction is
In market language, a correction is a fall of more than 10% from the latest high. It is not the same as a crisis, but it does mark a change of mood: after a long period of gains, investors begin to question the prices they were willing to pay.
Corrections are a normal part of how markets work. They can be short or drag on; sometimes they end in bigger falls and sometimes not, and nobody can know in advance. What one can do is understand why they happen and check whether one’s own portfolio is prepared to get through them without hasty decisions. For long-term investors, the key usually lies more in the plan made beforehand than in the reaction of the moment.
Rates and valuations
Companies whose value rests on profits arriving many years from now are the most sensitive to the price of money. When interest rates rise, those future profits are worth less today, and the stock market discounts it immediately. After years of almost uninterrupted gains, the market was a reminder that valuations depend on the price of money.
Put differently, the value of a company is calculated, to a large extent, by bringing to the present the profits it is expected to generate. The more distant those profits, the more the chosen interest rate weighs in discounting them. That is why growth companies, whose appeal lies in the future, react more than those that already produce stable profits. That does not mean some are better than others, only that each type of company responds differently to the same change in environment.
Concentration as a risk
Portfolios concentrated in a single type of asset felt it most. It is worth reviewing periodically how much weight each sector, each region and each type of asset carries, and whether that mix still fits each person’s or family’s goals and time horizon. A portfolio that has drifted out of balance during the rises may carry a much larger weight in one sector than was intended when it was built.
Reviewing does not mean changing the portfolio every time the market moves. It means checking, calmly and with an adviser, that the mix remains consistent with objectives, liquidity needs and time horizon, and that there is a plan in case the market goes against one for a while. This note is general information and not investment advice.
Long rallies make us forget that risk does not disappear: it only hides.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
