Silicon Valley, welcome back to the nosebleed section.
After its spectacular belly-flop in the dot-com bust of 2000, the tech-laden Nasdaq on Monday closed above 5,000 for the first time since hitting that milestone nearly 15 years ago.
The number at the closing bell — 5,008.10 — speaks volumes not just about the spectacular tech boom currently underway in Silicon Valley, and the yeoman’s job that a few giants like Apple have done to carry the momentum forward, but also about just how insane things were the last time the Nasdaq reached this pinnacle.
“The reason it’s taken so long to get back to where it was is that it was so ridiculously overpriced to begin with,” says Frank Jones, a finance professor at San Jose State who spent 23 years working on Wall Street. “It was the herd mentality back in 2000. It was a mania.”
The index, which is made up of more than 3,000 stocks and includes many small companies in its fold, took its sweet time reaching this threshold. From a low of 1,114 in October 2002, the Nasdaq plodded along for more than a dozen years to reach sight of its March 2000 peak of 5,048. But in its final sprint, the Nasdaq’s performance blew the others out of the water, more than doubling the Dow Jones index’s pace for this year.
Driven in part by the Federal Reserve’s policy of near-zero interest rates, which has made equities more enticing than bonds to investors, the Nasdaq’s tortoise-like ascent has been unusual, says John Shoven, director of the Stanford Institute for Economic Policy Research.
Compared with other indexes, “15 years is an awfully long time between an index hitting one high and then hitting another. So instead of saying the market must now be overvalued again, I say, wow, it’s been a long time coming.”
In that regard, the Nasdaq’s pending high-water marker underscores just how disconnected from economic reality things were back in the dot-com days, a time when companies were going public without even showing profits or revenues and startups like Pets.com and Webvan were skyrocketing to unimagined heights and then rapidly going down in flames.
Beacon Economics founding partner Chris Thornberg says “there was all kinds of craziness back in the late ’90s, with companies spending all sorts of money putting systems into place without a clue of what it all meant. By comparison, companies today are making money hand over fist and investing it in R&D. This time, they’re being smart with their money.”
He and others point to a new reluctance among entrepreneurs and their VC investors to take a company public without a proven business model in place first.
“Bottom line,” says Jones, “is that today is not anywhere near as crazy.” Today’s price-to-earnings, or P/E, ratios for the largest of the so-called Nasdaq 100 hover in the midteens, numbers that seem downright dowdy compared with over-100 figures hit by Cisco Systems, Oracle, AOL and Yahoo during the dot-com boom. That’s significant because the metric, which theoretically tells us how much investors are willing to pay per dollar of earnings, has historically averaged between 15 and 25.
When the doomsday naysayers point to companies such as Uber as illustrative of a super-inflated startup economy that’s a bubble in the making, Menlo Ventures’ Venky Ganesan says his VC firm’s early and big bet on the ride-sharing pioneer is a perfect metaphor for the difference between the two red-hot eras.
“The story of technology is that we overestimate its impact in the short run and underestimate it in the long run,” Ganesan said. “And that’s what happened with the Nasdaq; in 2000 — we overestimated how quickly the Internet would change our lives and now in 2015 we are underestimating the impact of mobile, social and cloud.
“The Nasdaq,” Ganesan said, “is finally catching up.”
Perhaps no one company says more about this tale of two Nasdaqs than Apple. In 2000, the company wasn’t even included among the largest 20 companies by market value in the index; today, with its $760 billion market value, Apple accounts for 10 percent of Nasdaq’s weight.
While this new milestone puts the excesses of the dot-com days in sharp relief, it also fuels anxiety among some investors and analysts who worry that we are in the midst of another bubble, evidenced by multibillion-dollar valuations for pre-IPO companies such as Uber and Snapchat, the Los Angeles-based firm behind a mobile app that sends disappearing photo messages.
“There’s something about the Nasdaq hitting a new high that makes me nervous,” says Cindy Hounsell, president of the nonprofit Women’s Institute for a Secure Retirement. “All these people have finally gotten their retirement accounts back up to where they were before the recession, which is great. But every time we’ve seen it go up and up we’ve also seen it go down. And research shows that Americans are really good about buying high and selling low.”
Regardless of what the Nasdaq’s next 15 years look like, Los Altos certified financial planner Esther Szabo says individual investors should keep their eye on the long term and not be distracted by either exhilarating highs or stomach-churning lows.
“It’s important for people to have a financial strategy in place that serves them well,” she says, “rather than going with what the markets are doing at any given moment.”
Stanford’s Shoven suggests that at least for the foreseeable future, even if a sky-high Nasdaq may bring back bad memories from the days of eToys.com and Flooz.com, things do look promising, especially right here.
“Silicon Valley is thriving and the pace of innovation is very, very strong,” he says. “I saw a semiconductor chip recently that had 8 billion transistors in it, which just shows that we haven’t yet tapped the unbelievable things we can do with the computing power we’re capable of.”
Says Shoven: “We’re just getting started.”
Contact Patrick May at 408-920-5689; follow him at Twitter.com/patmaymerc.
