“But they still lead me back to the long and winding road” – The Long and Winding Road, Beatles, 1970
In January 2000, I was an MBA student at the University of Chicago Booth School of Business. On the first day of Internet Strategy class, Professor Austan Goolsbee (eventually one of President Obama’s economic advisers), asked each of the sixty students to write down on a piece of paper their guess as to what the value of the Nasdaq would be on the last day of class. To raise the stakes a bit, Professor Goolsbee also had each of us contribute a dollar to the pot. Whoever guessed closest would win the entire $60! Spoiler alert…I didn’t win.
What is the relevance of this anecdote? Well, if you remember back to the spring of 2000, the stock market was flying high in the midst of the technology boom that began in the mid-1990s. On March 2, 2000, the Nasdaq hit 5000 for the first time in its history. To put in perspective how hot the market was at the time, the Nasdaq had eclipsed 4000 only 49 trading days prior and 3000 only 38 trading days before that. It seemed like 6000 was only a stone’s throw away. Who would have guessed that after hitting 5000 on March 2nd, the Nasdaq would not see that level again until 2015 – 3,766 trading days later!
What happened in the fifteen years between? Well, for one, the tech bubble burst in March 2000 and in the subsequent three years, the Nasdaq lost about 80% of its value. After regaining a bit of momentum between 2003 and 2007, the index plunged again during the financial crisis. Since bottoming out in March 2009, stocks around the globe have enjoyed a tremendous rally. Technology companies have been part of that rally. Tech companies are booming again led by household names like Apple, Amazon, Facebook, and Alphabet (formerly Google).
So, should we get excited about the Nasdaq hitting a new milestone? Or should we be as wary as some were in March 2000? Perhaps the right answer is both.
- The Nasdaq is much more diversified than it was in 2000 and much more diversified than people realize. While tech giants like Apple and Microsoft still are the most heavily weighted stocks in the index, only 44% of the companies in the Nasdaq are technology companies. By comparison, when the dot-come bubble burst, tech companies comprised over 60% of the index.
- During the tech boom, the Nasdaq was full of companies that had recently gone public. Many didn’t even have earnings. As an MBA student, I remember analyzing several aspiring public companies’ registration statements and being shocked by the fact that most defined their primary source of revenue to be from advertising on their websites! At its peak in March 2000, the Nasdaq had a price/earnings ratio of 70. Today it’s 27.5. While still more expensive that the S&P 500 at a price/earnings ratio of 17, the Nasdaq is far more reasonably valued today than it was 17 years ago.
So, like the Beatles song, the Nasdaq has had a long and winding road from its dot-com heyday to its recent milestone. Hopefully though, contrary to the lyrics, the road from here doesn’t lead us back to where things were before.