Round numbers on the Nasdaq Composite index, Wall Street’s technology-heavy market, often make investors nervous. Shortly after it hit 5,000 in early 2000, it plunged by 80%. In 2015, it finally regained the 5,000 mark and has now eclipsed 6,000. Considering the index took 17 years to go from 5,000 to 6,000, “it has not been a great investment”, notes John Authers on FT.com: the annualised return was barely above 1%.
There was money to be made by careful stock pickers over this timespan: 315 stocks have lost 90% or more of their value, but 125 have gained 1,000% or more. Interestingly, the two biggest winners aren’t tech firms. Soft-drink maker Monster Beverage takes the top spot with returns of 40% a year. The next-best performer was Middleby, an oven manufacturer that bought Britain’s Aga in 2015.
“Bubble talk is back”, but “take a deep breath”, says Ben Levisohn in Barron’s. There is no evidence of the widespread mania we saw in 2000, when investment banks and the stockmarket hurled stacks of money at even the most dubious start-up simply because it was an internet-based business. The likes of health-information website DrKoop.com, clothing retailer Boo.com and Pets.com were awarded outlandish price-earnings ratios because of the “eyeballs viewing their web pages, not stodgy metrics like sales and profits”.
This time round, the index is more diversified than in 2000. Technology stocks comprised 60% of the index then, compared to 40% now. Valuations are far more reasonable: the index reached a forward p/e of more than 70 in 2000, as opposed to 23 now. The wider S&P 500 is on a forward p/e of 18.
And the buzz is concentrated on Apple, Facebook, Alphabet (Google’s holding company), Netflix, and Amazon, the high-flyers who have powered the rally. Far from being symbols of dotcom irrational exuberance, these companies are becoming so powerful that there is talk of competition authorities and governments reining them in. Already a quarter of the world’s population visits Facebook once a month.
The upshot is that the Nasdaq at 6,000 “looks a lot more stable” than the Nasdaq at 5,000 17 years ago, says Dan Gallagher in The Wall Street Journal. Still, the premium to the wider market, and sky-high p/es at some of the big firms – Amazon is on 129 times forward earnings – suggest the Nasdaq represents “a growing bet that big tech… can continue to defy the law of gravity”. The Nasdaq will remain a market for very careful stock pickers.