By E.S. Browning
The Nasdaq Composite Index broke through 5000, returning to a
level it hadn't seen in nearly 15 years and moving within range of
a record for the first time since the Internet stock bubble.
The index rose 44.57 points, or 0.9%, to 5008.10, re-entering
the rarefied territory it occupied for just two days before it
collapsed in March 2000, helping precipitate a two-year bear
market. It now stands less than 1% from the record 5048.62 hit on
March 10, 2000. The Dow Jones Industrial Average and S&P 500
also rose Monday, both closing at records.
The tech-heavy Nasdaq is on a run again, nearly quadrupling in
value during a six-year bull market that began in 2009. This isn't,
however, your father's Nasdaq.
"I don't see the lunacy I saw in the dot-com bubble," said
financial historian Richard Sylla of New York University's Stern
School of Business. "Computer clicks are still important in our
lives, but we don't use the number of clicks to decide how
promising a company is, as people did then. Investors are much more
circumspect about thinking, is this thing really going to pay
off?"
In 2000, the Nasdaq was a Wild West boomtown, driven by a mania
for technology stocks. Today, while still dominated by tech stocks,
the Nasdaq is less manic and more stable.
Back then, investors were mesmerized by startups with names such
as Cyberian Outpost, theglobe.com and Pets.com, the last of which
featured a still-famous sock puppet of a dog in its ads. Many such
companies lost most or all of their value in the collapse. Big,
profitable companies including Cisco Systems Inc., Intel Corp. and
Microsoft Corp. fell more than 50% and still haven't returned to
peak levels.
Only 68 of the 100 biggest Nasdaq companies in 2000 had net
profits, according to Ned Davis Research. The rest traded on
eyeballs, clicks and bright futures. Today, 90 of the top 100
companies are profitable. Many pay dividends, which few did in
2000.
Perhaps the biggest change since 2000 is that ordinary Americans
no longer view stocks as theater. Barbershops and bars are back to
showing sports on televisions, not stock commentary. Taxi drivers
have stopped offering stock tips. Ordinary people talk about other
things at parties.
In some ways the Nasdaq today resembles the Dow Jones Industrial
Average of the 1920s, 1930s and 1940s, Prof. Sylla said. Industrial
companies were that era's version of tech companies; some
historians have said that electricity was an even bigger
revolutionary force than the Internet.
The Dow fell 89% from its 1929 peak to its 1932 trough, while
the Nasdaq fell 78% in the dot-com collapse. Now, the Nasdaq has
grown up a little, as the Dow did after 1929. "How much have things
changed," said Laszlo Birinyi, founder of research and investment
firm Birinyi Associates in Westport, Conn. "The market is at new
highs and almost no one is writing about it." In the late 1990s,
Mr. Birinyi recalled, he saw financial news on a television in an
Aspen, Colo., ski shop.
The market gains these days are driven more by big investors
such as hedge funds and other money managers than by small
investors speculating on future winners. Mr. Birinyi said some of
that wariness on the part of individual investors is due to
demographics, such as an aging population. Some, he said, is that
"we have had very significant downdrafts that were very
painful."
In the six years from 1995 through 2000, Americans put $1.05
trillion into U.S.-stock mutual funds, according to data from the
Investment Company Institute, a mutual-fund trade group. In the 14
years since, they have withdrawn a net $394 billion, the data show.
A lot of investment money has gone to bond funds and foreign-stock
funds. Some went into investment funds that trade on stock
exchanges, known as exchange-traded funds. Even counting ETFs that
contain stocks, some of which are used heavily by professional
money managers rather than mom-and-pop investors, U.S.-stock funds
haven't received as much money in 14 years as they did during those
six glory years.
"Clients recognize they need more stock exposure, but they
really aren't enthusiastic about making that move," said Bruce
McCain, who helps oversee more than $25 billion as chief investment
strategist at Cleveland's Key Private Bank. "There is still the
general feeling that stocks are far riskier than people thought
before the meltdown in 2007."
The changes are widespread. The index gains this time have been
driven by different companies, including Apple Inc., which wasn't
among the 10 biggest Nasdaq companies in 2000, and Google Inc.,
which went public in 2004. Of the five biggest Nasdaq companies in
2000 by market value, none has returned to its nominal market value
of that era. After adjusting for inflation, none of the top 10 from
2000 has.
In 1999, 11 young companies rose more than 1,000% from first
share issue to year-end. None has done so since, according to
Birinyi Associates. The Nasdaq index today trades at 32 times its
companies' profits for the past 12 months. That is high compared
with indexes such as the S&P 500, whose stocks are at about 19
times profits. In 2000, however, the Nasdaq's ratio was 175.
Because it contains many small, volatile, fast-expanding companies,
its average since 1995 is 57.
It took the Nasdaq just 49 days to jump to 5000 from 4000 back
then. After closing above 5000 on March 9, 2000, the index stayed
above that level for just one more day, March 10. It then collapsed
into a bear market. This time, it has taken more than 300 days to
move to 5000 from 4000.
"The fundamentals aren't nearly as stretched as in 1995 or
2000," Mr. Birinyi said.
The Nasdaq still has some distance to go before it gets back to
nosebleed territory in real terms. Adjusted for inflation, which
economists say is essential when comparing stock values over long
periods, the Nasdaq index remains far from its old highs. It would
have to reach 6908 today to have the same value as it did at 5000
in 2000-era dollars, according to Birinyi Associates.
Some investors think stocks have risen so far that they are
overdue for a pullback, but they generally see a different kind of
pullback than in 2000.
Prof. Sylla of NYU said he is lightening up on stocks, putting
more money in cash, but he isn't anticipating a devastating bear
market. "If the market falls 10% or 20%, I will be in better shape
to buy back in," he said. "The overvaluation was much greater then
than it is now."
Write to E.S. Browning at jim.browning@wsj.com
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