As The Dow And S&P Climb Ever Higher, The NASDAQ Is Held Up By The Dot-Com Bubble

Michael Teague  |

The bull market conditions of 2013 have seen the Standard & Poor’s 500 and the Dow Jones Industrial Average at new all-time highs with shocking frequency. Just last week, the S&P 500 broke above 1,700 for the first time ever, and the Dow finished in a similar fashion north of 15,600.

And while each higher finish for the benchmark indices has been welcomed with optimism, less attention is typically paid to the fact that the NASDAQ last hit its all-time high over a decade ago back on March 10 of 2000, when it topped out at 5,048.62. To put this into perspective, the exchange closed last Friday at 3,689.59, nowhere near its peak. With the Fed’s gradual drawdown of fiscal policy seemingly on the horizon, and given the way investors have been reacting to the mere mention of the word “taper”, it is not clear whether the current conditions will be in place long enough for the NASDAQ to get anywhere near where it once was over 12 years ago now.

The NASDAQ’s lagging behind the indices is a directly result of the dot-com boom of the late 1990’s that saw a variety of new, “tech” companies infiltrate the exchange, as well as the imaginations of investors and traders, on the promise of a totally new industry with the capacity for exponential growth.

Of course, the outcome of that story is well-known. The dot-com boom turned out to be a modern-day tulip-bulb craze, as was so aptly described in Burton Malkiel’s A Random Walk Down Wall Street. Indeed, between late 1998 and March 2000, the NASDAQ tripled, at least in part thanks to new publicly traded companies, some of whom barely had any product or service which they could offer to generate any sort of revenue.

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The legacy of that tech bubble lingers on today, and not just because it put the NASDAQ at such an enormous deficit that it is simply a matter of catching up. Indeed, the dot-com boom included a great many companies with little or no staying power to speak of, but it also lifted the dominant techs of the time, such as Intel ($INTC), Microsoft ($MSFT) and Cisco ($CSCO) among others to peaks that they, like the NASDAQ itself, have never reached since.

And given the tectonic shift in the tech industry brought on by mobile devices that has wrested a large chunk of market share from the older hardware and PC firms, it does not look as though most of these stocks have much of a chance of eclipsing their lofty former watermarks. The dot-com boom left a great deal of techs trading on the NASDAQ, who are likely to never return to their previous and greatly exaggerated valuations. By comparison, the S&P 500 and the Dow are far less weighted by tech stocks.

A related reason for the NASDAQ’s underperformance relative to the indices is Apple ($AAPL). The one veteran computer company to have not only successfully embraced the new mobile tech, but who can be credited with inventing or at least standardizing the trend with the iPhone and iPad, is in many ways beginning to resemble its former peers from the days of the PC and the laptop.

Since the company’s shares topped $700 in the fourth quarter of 2012, it has been a downhill slope. With a dearth of upcoming products or innovations, and increasing pressure from competitors such as Samsung and Google’s ($GOOG) Android operating system, the stock has lost over $300 dollars of its price in less than a year’s time, though it has rebounded somewhat in the last month. All the same, Apple, along with tech companies in an even worse position, have been a drag on the NASDAQ over the last decade.

So the legacy of the dot-com boom is still alive, and continues to affect stocks. Investors can only hope that the ascendency of mobile devices, with the promise of millions upon millions in advertising revenue, will not turn out to be the same kind of bubble.

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