How did the NASDAQ unravel in 2000 – 2002? The recent swoon in US Tech names is drawing comparisons to the bursting of the Internet 1.0 dot com bubble. Let’s see how apt a comparison that really is.
The chart below shows 5 datapoints related to the NASDAQ melt up, melt down, and eventual recovery from 1998 to 2003:
- 1: After chugging higher in 1998 (+38 percent) and the first 3 quarters of 1999 (+25 pct), the NASDAQ entered its bubble phase from Q4 1999 to March 10th, 2000 (up 85 pct).
- 2: The first pullback from the March 10th highs was dramatic: 36 percent in 6 weeks.
- 3: By the end of 2000, it looked very much like the NASDAQ bubble had deflated. The index was back to 2500 (July 1999 levels), down 51 percent from the March highs.
- 4: The NASDAQ bear market was still not over, however. It lasted until October 2002, with the NASDAQ falling another 55 percent from its December 2000 close.
- 5: Peak to trough, the NASDAQ fell 78 percent over 19 months, from March 2000 to October 2002.
So, how can this history be useful in interpreting today’s market? Two thoughts:
#1: The first break in the NASDAQ from the top in March to April 2000 (down 36 pct in 6 weeks) was an important tell that market psychology had changed. If you were investing back then, you likely remember the debates surrounding this topic. In retrospect, it was an obvious signal but at the time it was not as clear.
While not easily visible on the chart, the breakdown really began on March 27th, and the NASDAQ fell by 24 percent over the following 15 days. If we start the current NASDAQ meltdown calendar at January 3rd 2022, we are 15 days into the current drop and down 14 percent.
Upshot: as rough as the NASDAQ has had it in the last 2 weeks, it is nothing like the initial declines as the dot com bubble started to burst in 2000. Now, if it suddenly slumps further – that will be important.
#2: The NASDAQ of 1999 – early 2000 almost doubled (+85 pct) in just 5 months; that was the “bubble”. Those around back then will remember George Soros turning from tech bear to bull in Q4 1999 and how many investors followed his lead, as well as all the financial liquidity the Fed pumped into the system just in case Y2K computer system problems proved serious. They were wild times …
We’ve had no such run this time around for the NASDAQ, which is still only 39 percent higher than it was in February 2020, just before the pandemic meltdown. Yes, at various points in the last year the NASDAQ has been up close to 100 percent from the year before, but only when comped against the March 2020 lows.
Upshot: in this respect, the NASDAQ of 2022 is fundamentally different from the index in 2000. Bubbles tend to start by inflating slowly at first, but then quickly at the end.
Takeaway: the old trading aphorism that “price leads fundamentals” is our guiding star with this analysis. If there really is a long slide coming for the NASDAQ, then we should see it drop quickly in the next few weeks. Why not sell now? Because, unlike in 2000, the NASDAQ is dominated by global leaders in their industries and these firms generally enjoy very high profitability. That was not the case in 2000, which is why that chart we showed you above looks the way it does. From this perspective, 2022 should not end up repeating 2000 when it comes to a true “tech wreck”.