Money and Markets

Crash in Nasdaq looking a lot like bursting of 2000 dot-com bubble — and that lasted almost 3 years

Business Insider US
The Nasdaq has plunged more than 30% since its November high.
The Nasdaq has plunged more than 30% since its November high.
  • The Nasdaq stock index is plunging faster than during the dot-com crash in 2000, dredging up bad memories on Wall Street.
  • Back then, the index fell for around two-and-a-half years and only regained its 2000 peak roughly 15 years later.
  • Investors are praying the current downturn doesn't turn into a similar rout, but the similarities are striking.
  • For more stories go to www.BusinessInsider.co.za.

The plunge in the Nasdaq has been swift and brutal: the tech-heavy stock index has now slumped more than 30% from its November peak.

For many on Wall Street, the plunge is raking up nasty memories of the bursting of the so-called dot-com bubble in 2000. In fact, the sell-off so far has been worse than back then.

From its peak on November 19 last year, the Nasdaq Composite index had plummeted 32.7% as of Monday's close, according to data company FactSet.

Over the same timeframe, the Nasdaq had dropped 25.2% from its peak on March 10, 2000 through to September 28.

The scary thing? In 2000, the Nasdaq kept tumbling. It dropped almost continuously, falling 78% from March to early October 2002 — a brutal two-and-a-half year wipeout. The index didn't regain its 2000 high until 15 years later.

"I think 2000 to 2002 is the parallel for various reasons," Ben Laidler, global market strategist at trading platform eToro, told Insider. "A, because this is tech-led, and B, because this is valuations-led."

Laidler said both the current tumble and the dot-com crash were driven by investors realising that technology companies' stocks were far too expensive relative to their earnings, after a huge increase in prices in the preceding decade.

The Fed isn't coming to the rescue

The Federal Reserve raised interest rates in late 1999 and early 2000, as it's doing now. And geopolitics was also at the top of investors' minds: The 9/11 terrorist attacks came roughly half-way through the dot-com crash. Now, investors are worrying about a war in Ukraine that's driving up energy prices.

Perhaps most unsettling of all for investors in 2022 is the fact that the Fed shows no signs of slowing down its interest-rate hikes, which have sent bond yields surging and destroyed the appeal of technology companies with little in the way of earnings.

From January 2001 onwards, the Fed cut interest rates 11 times, according to Jessica Rabe, co-founder of financial analysts company DataTrek.

"Not even an accommodative Fed was able to rescue the Nasdaq in the early 2000s, but who knows how much worse it could have been had the central bank needed to keep raising rates to rein in inflation," Rabe said in a note to clients on Wednesday.

This time around the Fed is in fact stepping up its hikes, with traders betting that it will raise interest rates by 75 basis points — a move not seen since 1994 — later on Wednesday.

Big players can lift the Nasdaq

So is there any good news for investors? Although markets often rhyme, they don't repeat themselves, Laidler said.

Back in the 2000s, the Nasdaq was chock-full of technology companies that made no money. There are plenty of those these days, and they're being punished. Witness Teladoc's 90% plunge from its February 2021 peak.

Yet the Nasdaq is now dominated by companies that are effectively giant money-printing machines, Laidler said. Alphabet, Amazon, Apple and Microsoft are among the biggest names. Tesla, which turns a healthy profit these days, is another key component.

Another important factor is the run-up in stocks before their respective crashes. The Nasdaq partly fell so far and so fast in 2000 because it had surged around 950% over the preceding decade.

In the decade to November 2021, the index rose by roughly 450%. A small comfort, perhaps, but investors will take all they can get right now.


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