Broad Declines Typically do Begin in One Segment

This year the Nasdaq is down 3.5% year to date, and is 7.75% lower than it was at its peak in mid March.  The S&P 500 is still flat for the year though.  The fact that the S&P 500 is holding up as the Nasdaq falls could be a sign of broader strength outside of a small segment of companies, but the strength also isn’t atypical of the beginnings of a bear market either.  When a wave of negativity starts to hit markets it often begins in one segment and slowly spreads to others over time.

In 2000 the Nasdaq began to show volatility before the S&P 500 picked it up.  The Nasdaq fell 36% from its peak between March and May of 2000, but the S&P 500 held relatively flat the whole time.  In fact, the S&P 500 finished 2000 lower by 10%, but the bulk of the decline didn’t come until after the summer.

A similar divergence happened in the 2008 bear market too.  Financial companies began to sell off in 2007, several months before negativity was captured by the broader indexes.

Nasdaq vs. S&P 500 2000