Our Dot-com Moment

Reward v. Risk
June 2, 2020

The Nasdaq Composite Index has just surpassed 10,000 for the first time ever! Although I don’t agree with the valuation from a fundamental standpoint, the number is currently justified by its presence in our reality.

As someone who spends an inordinate amount of time immersed in securities data and charts – both current and historical – I don’t mind saying that I derived a surprising amount of satisfaction watching my screen as the value grinded up to and then beyond 10,000. In my opinion, it was truly an historic moment. And I watched it happened! Pretty neat!

What makes it even more interesting to me is that we were so close to hitting this mark almost exactly 20 years after the index peaked just over 5,000 in the year 2000. That’s right, it was only back on March 7th of 2000 that the index broke 5,000 for the first time. Two days later, the index logged its first close above 5,000 at 5,046.86. The very next day, the Nasdaq Composite Index hit its then all-time high of  5,132.52.

Unfortunately, these fresh highs weren’t meant to last. In fact, the Nasdaq Composite Index didn’t see these levels again until June 18th of 2015, when it finally carved out a new high of 5,143.32. To make matters worse, between those two points, the Nasdaq Composite Index fell on hard times, setting a low water mark of 1,108.49 on October 10th of 2002, 78.4% below its all-time high. A second close call with this dismal level occurred on March 9th of 2009, when the index bottomed out again at 1,265.52.

But that is all in the past now. The Nasdaq Composite Index has traded above 10,000 for the first time in history!

What is a little curious, though, is the sight of investors seemingly clamoring over one another to participate in these new all-time highs knowing this storied history. After all, if the Nasdaq Composite Index were an individual security that could be purchased at the price of its value, it would have taken those that bought this fictional security at its last red letter high of 5,000 more than 20 years to double their investment. That translates into a compounding annual rate of return of right around 3.5%. That doesn’t sound too shabby given where interest rates are today. However, considering that this investor would have had to tolerate a decline in value of 78% two years after their purchase, and found that their initial investment was down around 75% (assuming they made their purchase right at 5,000) nine years after their purchase only to break even after holding the investment for 15 years, it’s clear that the investment would have possessed a little more variance than fixed income alternatives that offered a twenty year 3.5% yield at the same time that the investor made their ill fated purchase of our fictional Nasdaq Composite Index security.  

After speaking with many investors and a few asset managers that participated in the year 2000 Nasdaq peaks, it is clear that, at that time, it seemed to many of these investors as if the market would never stop increasing in value. At that time, those who did not participate in the seemingly ceaseless increases in market value were perceived as foolish for missing out.

Though not similar in all ways, I see many parallels between our present condition and those heydays of what is now popularly known as the Dot-com Bubble. I fear that history will not be any kinder to those who are willfully blind to the warning signs today than it was to those who looked past the sustainability of the economics back then.

Nonetheless, the Nasdaq Composite Index reaching 10,000 is an amazing milestone that deserves mention. What times we live in!

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