The NASDAQ Composite is dominated by techs, including Apple, Microsoft and the FANGs (Facebook, Amazon, Netflix and Google/Alphabet). And the index has recently passes a milestone that not so long ago seemed impossible. But can it last?
March 10th, the year 2000: The NASDAQ composite closed at 5,048.62. It had been quite the ride, with the index breaking 1,0000 just a few years earlier.
And then dotcoms crashed. Within 18 months of that 2000 record, the index was down to around 1,300. The collapse in dotcoms had several important effects: For one thing, it created contagion and led to a wider stock market collapse. This all led to a mild recession in the US. But for techs, the impact seemed devastating. In the eyes of many investors, tech had become synonymous with Ponzi schemes. Many concluded that the internet was an overhyped, here today gone tomorrow phenomenon. And investors flocked to property.
Indeed, you can date the beginning of the bubble that created the 2008 crisis to the dotcom crash, as investors fled from equity to leveraged investment into bricks and mortar.
But there was irony in the change. Although the stock market crash of the early years of this millennium was severe indeed – perhaps the worst crash since 1929, the economic repercussions were not great.
Contrast that with the debt bubble of the mid-years of the noughties. When that burst, the stock market collapse was almost but not quite as severe as what we witnessed in 2000. But the economic consequences were catastrophic.
In the wilderness years, post-dotcom crash, many pundits suggested that the index would never again pass such dizzy heights – that the 5,048.62 record would last into perpetuity. Some likened it to the women’s world record for 100 metres – set by Florence Joyner (Flo Jo) in 1988, a record that no one has got close to since. But the Flo Jo’s record is steeped in controversy – was it drug assisted? So the parallel with the NASDAQ record was good, a record charged by irrational exuberance and madness of the crowds – an artificial record, perhaps.
It is just that in the spring of 2015, the NASDAQ set a new record, storming past the 5,000 mark. “It’s a bubble,” lamented the cynics, “it will all end in tears.”
Well, maybe one day. But all we can say is that for a brief few minutes on Monday 18th December 2017, the NASDAQ Composite was over 7,000.
At the time of writing it is a smidgeon under 7,000, it will be interesting to see if it can finish the year above that level
Recent rises in US stock markets, both NASDAQ and other indices, can be explained by changes in US tax policy. Corporation tax is going down, therefore, companies will pay less tax, therefore, shares have risen.
But to find the real reason why the index has performed so well for so long look at a handful of companies.
Apple, Microsoft, Alphabet, Amazon, Facebook and Netflix have a combined market cap of around 3.5 trillion dollars. Do you think these companies are appropriately valued? If you do, there is no bubble with the NASDAQ.
But then again, consider bitcoin. There is a view, it has been expressed here before, more than once, and it is becoming more widely held, that bitcoin is a bubble. If is crashes will it drag the NASDAQ down with it?
Well, human nature is a funny thing, one can never say for sure how people will react. But profits enjoyed by the big techs do not seem to have a lot to do with bitcoin – if indeed anything.
There is another point. The bitcoin boom, just like the dotcom boom of the late 1990s, is not fuelled by leverage investing, and the lesson of the dotcom 2008 and subprime booms and crashes, is that wider contagion, hitting the economy, tends to be more severe when they are built on leverage. This does not apply to the bitcoin boom.