Party Like It’s 1999?

The Nasdaq Composite Index closed at another all-time high on Monday. And while the index has pulled back about 1% over the last couple of days on some key earnings reports (most notably Apple and Microsoft), the tech-heavy index is still up over 9% this year compared to about 2.5% for the broader-based S&P 500 index. Including this year’s gains, the Nasdaq is now up an incredible 308% over the past 6+ years since the financial-crisis low on March 9, 2009. This compares to an increase of 212% for the S&P 500 over the same time period.

We were interested to see how the current Nasdaq bull market stacked up against the technology-bubble era, which started in the mid-1990’s and ended with a brutally painful crash lasting for most of the first three years of the new millennium. If we use a starting point of January, 1, 1995, the Nasdaq climbed an even greater 579% in the 5+ years until the market peak on March 10, 2000. That bull market was both more powerful and shorter in duration. But it still looks eerily familiar on the chart below.

6cf65871-1d2a-43e9-b29a-3f9aa2c76729Source: Data obtained from Bloomberg.

One interesting comparison between the tech bubble of the late 1990’s and today’s Nasdaq bull market is that in the 1990’s the Nasdaq’s appreciation was much more dependent on the largest companies within the composite. The first chart below shows that the Nasdaq 100 Index, which is made up of the largest and most heavily traded non-financial stocks within the Nasdaq Composite, far outperformed the overall composite in the 1990’s. In fact, the Nasdaq 100 increased over 1000% compared to the 579% increase in the composite.

3f540363-212e-4153-b665-5af8513b76eeSource: Data obtained from Bloomberg.

The next chart shows a different story. It depicts a current bull market as having more broad-based participation. The Nasdaq 100 is up only modestly more than the composite at large (+343% compared to +308%). This suggests that a rising tide has lifted more boats than was the case back in the 1990’s. Is the seemingly more broad-based Nasdaq recovery (relative to the tech-bubble era) a good thing or a bad thing? Well, it’s hard to say. One reason that the current bull market looks broader-based is that many smaller companies in the composite have snapped back sharply from the severely oversold conditions during the throes of the financial crisis. Companies that had been left for dead suddenly saw huge buying interest as it become clear the world wasn’t ending.

0942afd4-06f6-4757-b5b9-15808808d8b5Source: Data obtained from Bloomberg.

But this is not to say that the current Nasdaq rally has not been heavily dependent on some very large companies. There are some massive companies in the Nasdaq that have grown in value by many billions over the course of the current bull market. The difference is, though, that these companies have real earnings power and balance sheet strength, to include enormous stockpiles of cash that can be used for organic growth, acquisitions, stock buybacks or higher dividends. Back in the late 1990’s the companies driving the index higher were very often devoid of earnings and highly dependent on the capital markets to fund operations as they lost money on an operating basis. In fact, today’s P/E ratio for the Nasdaq 100 of about 23.4x, according to data obtained from the Wall Street Journal, seems very reasonable compared to the heights of the tech bubble. At that time, many of the large component companies had P/E ratios of infinity, meaning they had no earnings at all.

One additional consideration is that while the Nasdaq has finally eclipsed the highs of the tech bubble, there is no adjustment for inflation. If we deflate the current level for the Nasdaq composite (5,172) by the average inflation rate (using CPI) over the past 16 years since the tech-bubble peak in 2000, the index would actually be trading at a little over 3,600 right now – 30% lower than the highs of March, 2000. This suggests we remain a good distance from the “irrational exuberance” that existed back in those days.

What else does this all tell us? Well, the only comforting thing I can think of is that we shouldn’t be as worried as we were back in the late 1990’s. It doesn’t take a genius to see that we have a frothy tech-laden Nasdaq, heavily influenced by some hugely important component companies, that has risen over 300% in just over 6 years. Let’s hope these high-fliers have plenty of hot air to keep them afloat.

Peace,

Michael