What you can learn from the NASDAQ taking 15 years to recover from the dotcom bubble

Julie Brownlee, Fsp Invest, 04 May. 2015

Tags: nasdaq, dotcom bubble, nasdaq high, stock markets, stock market bubbles,

The NASDAQ is the second largest stock market in the US. It has more than its fair shares of technology stocks.

When the dotcom bubble burst in 2000, this stock market plummeted.

The NASDAQ’s taken 15 years to recover and has now hit a new all-time high.

Let’s take a closer look…

The NASDAQ and the dotcom bubble

The NASDAQ has finally hit a new high after the dotcom bubble burst. It took a full decade and a half to achieve this.

The NASDAQ lists many of the US’s top IT and biotech stocks. It attracts many smaller companies from these sectors.

Being heavy in these kinds of stocks means that in the three years leading up to the NASDAQ’s peak in 2000, it rose nearly 300%.

After reaching its high, the NASDAQ Composite fell almost 80% over the next two-and-a-half years. That’s from 5,000 points to 1,120 points.

From this spectacular bubble, perhaps unsurprisingly it turned out that many of the stocks weren’t worth nearly what the stock market valued them at.

What the NASDAQ’s performance says

So for the NASDAQ to hit a new high now is pretty impressive. It highlights two important points…

Point one:
Driving the recovery of the NASDAQ has been the success of a number of new companies. Many of these weren’t even around when the dotcom bubble burst.

For example, Google, which is worth some $380 billion, only listed on the NASDAQ in 1998. Facebook is another example. It’s worth $225 billion and only listed in 2012.

These companies are bigger than established oil giant Royal Dutch Shell, which is the largest company on the FTSE 100, David Thornton in Penny Sleuth explains.

Point two:
Many of the companies that survived the bubble bursting went on to do very well. Examples include Apple, Microsoft and Intel.

The bubble bursting returned their valuations to normality.

Is another bubble returning to the NASDAQ?

Even though the market has climbed back and has hit a new high, it doesn’t mean another bubble is brewing. Now the market is more fairly valued.

For example, at the height of the bubble, Microsoft’s PE was 57, it’s now around 19. Valuations now look much more sensible.

What happened on the NASDAQ shows that over the long-term, stock markets do recover. And in many instances, it’s smaller, growing companies that help to drive that recovery.

So there you have it. What you can learn from the NASDAQ taking 15 years to recover from the dotcom bubble.

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