Those of you old enough to remember the NASDAQ Composite Index run-up in the 1990’s, and subsequent meltdown in early 2000, probably have not yet gotten over your “losses,” nor regained 100% confidence in the markets. I placed the term “losses” in quotations simply because most people were gaining paper wealth on very small actual investments, and when the bottom fell out, it was primarily paper losses that made many investors grieve.
In my early career in financial advising and doing live radio, I predicted that it would be many years before the NASDAQ regained its lofty high of 5,048.62, where it peaked on March 10, 2000. In fact, it did not achieve that level again until April 23, 2015 – a recovery period of over 15 years. Factoring in the inflation rate during that period, the NASDAQ Index was still effectively 37.6% lower than its high of 2000.
Today the seemingly unstoppable NASDAQ Composite Index has been setting new records, most recently 9,402.48 on January 23, 2020. This level reflects a gain of over 86% from the highs set in 2000, and a whopping 641% since the beginning of our current Bull Market in early 2009. “Is it sustainable?” is one of our most frequently asked questions.
“Sustainability” is not a particularly useful word to describe the level of the stock market. Financial markets are risky (which in this context means “variable”), and as such are always prone to a rise and/or fall of some magnitude. However, decades of history teach us that markets are also resilient, meaning they have always come back to, and then exceeded, any and all prior high levels.
The 1990s brought proliferation of the Internet into private homes all across America and the world. Home use, coupled with the burgeoning capability of innovators to provide new concepts, produced exponential growth of interest among potential investors.
Today’s NASDAQ Composite Index is computed the same as the 1990’s NASDAQ. However, individual valuations of companies in the Index is vastly different. In the 90s, startups (dubbed the “Dot-Coms”) were popping up every day. None had yet made a penny of profit, but the exciting new world of online investing did not care.
We all know the ugly result, when in early 2000 the NASDAQ (along with other market indices) made a stunning reversal. Companies ran out of cash, investors were left with little or nothing, and the sour taste in people’s mouths remains to this day.
“It’s different this time.” Those are some of the scariest words in the language. Yet, this time things really are different, and today’s successful NASDAQ companies are valued on more traditional attributes, such as actually making a profit. In a nutshell, that’s what took the recovery so long to produce new highs in the Index. It was worth the wait to regain sensibility in today’s market valuation formula.
In the “Dot-Com” era, too many “investors” were only invested in the fledgling NASDAQ companies. Perhaps the best takeaway from all the subsequent pain is the constant need for long-term investors to diversify among various asset classes and to stay diversified. We can help.
Van Wie Financial is fee-only. For a reason.