NASDAQ Topping 4,000, Is the Dot-com Bubble Upon Us Again?

NASDAQ
NASDAQ

NASDAQ recently topped the 4,000 mark last Tuesday and it is the first time it reached the mark since the dot-com bubble exploded almost 13 years ago today. NASDAQ, the technology-heavy U.S. stock exchange, followed the earlier surges exhibited by the Dow and by the S&P 500.

NASDAQ was up Monday by more than 32% since January 2013 but on Tuesday it peaked at 4,017.75 or a rise of 23.18 points allowing the index to be up by 33% for the year. However, based on the stock exchange’s peak which it attained on March 10, 2000 of a record close of 5,048.62, the current mark is still off by more than 1,000 points. Many are now wondering if this is a sign that another dot-com bubble is in the making.

The milestone figure in stocks was achieved despite a decline in consumer confidence pegged at a seven-month low. Based on the Consumer Board’s consumer confidence index it went down to 70.4 this November which is way below the 73 analysts expected to reach. The November figure is the lowest so far since April of this year.

The drop in consumer confidence was nonetheless offset by the steady expansion of the U.S. economy after the 2008 financial crisis debacle as well as the impetus provided by the Feds in minimizing the interest rates from skyrocketing. By holding the interest rates at a relatively low level, investors are now predisposed to buy riskier investments like equities and stocks.

But what is surprising is the fact that NASDAQ’s top performers for this year are not just technology-based companies as compared to the December 1999 make-up or just before when the dot-com bubble burst. The top performers that doubled or tripled their share prices include the streaming-media firm Netflix which is up by 284% and electric car manufacturer Tesla Motors Inc. which is up by 256%.

According to Arjun Arora from a San Francisco-based online advertising company, investors these days are more aware of the distinction between what are tech stocks and non-tech stocks as compared to 13 years ago. Dan Veru, the chief investment officer of Palisade Capital Group added that this time around the market is distinguishing between business models that work and those that are not working.

Dane Leone the head of investment strategy at Macquarie said that when the dot-com bubble exploded many stocks came from companies that have no profit, no warehouses and some have no products at all.

This just means that technology and the internet was a medium to do business and not the business itself, says Jack Ablin, the Chicago-based chief investment officer of BMO Private Bank. And this form of maturity can be the main factor why the dot-com bubble 13 years ago will not happen today despite some record milestones achieved at NASDAQ and other stock exchanges.

In 1999, after breaching the 4,000 level many believed that another Industrial Revolution is in the making because of the tech boom. But four months later, the investors’ fixation on tech stocks burst when the NASDAQ fell below 4,000. This is because unprofitable corporations like Pets.com and EToys were not that sustainable after all.

According to Birinyi Associates, a research firm, traditional tech stocks today is only 45% of the total index’s weight as compared to 1999 where tech stocks comprise 66%. Also, health-care stocks runs at 14% as compared to 1999’s 6% and consumer stocks have also increased from 5% to 17% in 2013. The shifts in percentages for 2013 when compared to 1999 are very evident in the breakdown because it is now more diversified. Also, Amazon.com Inc. and Netflix are now classified as consumer stocks and not as tech stocks. Investors say that they like this classification because these companies are actually offering services where consumers can save money instead of offering technology with no clear benefits.

When all these factors are taken together, the dot-com bubble everyone fear might happen again because NASDAQ just reached 4,000, may just be stretching their creative imaginations. But then again, anything is still possible.

By Roberto I. Belda

Sources

Wall Street Journal

LA Times

Mercury News

USA Today

 

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