Why Nvidia Stock Tanked Today
What happened
Shares of semiconductors star Nvidia (NASDAQ: NVDA) declined 4.4% through 12:12 p.m. ET Tuesday. That was about twice the decline suffered by the growth-stock-heavy Nasdaq index of companies, but it looks like both Nvidia and the Nasdaq, as a whole, are going down for the same reason.
So what
Specifically, Fed Chairman Jerome Powell just told a Senate panel that the Fed is considering accelerating winding down its bond-buying program and concluding its tapering "a few months sooner" than previously expected.
Powell explained that "inflationary pressures are higher" than he had thought previously, and in order to combat this inflation, it may become necessary to shut down the federal money-printing presses that have been flooding the economy with cash for years.
Image source: Getty Images.
Now what
What does that mean for growth stocks? Well, suffice it to say that they've fared pretty well in an era of loose monetary policy.
The Nasdaq has nearly tripled in price over the past five years, and analysts attribute a lot of this growth to the fact that the Fed has been pumping as much as $120 billion a month in liquidity into the economy through its bond purchases. (When your bank is only paying you 0.01% interest on your deposits, you're more likely to take any extra cash you've got and put it in the stock market -- helping to push stock prices up.)
The prospect of the Fed money going away therefore has growth-stock investors feeling nervous today -- and Nvidia investors, in particular. After all, with a price-to-earnings (P/E) ratio of more than 100 today, Nvidia stock looks richly priced, even for the 40% long-term earnings growth rate that Wall Street forecasts for it. If Fed policy does anything to slow down that growth rate (like tapering or even ending its bond purchases, for example), it's going to have an outsized effect on how much investors will pay for Nvidia.
Simply put, it's fear of the Fed that's spooking Nvidia stock investors today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.
