Five Years After Peak, Nasdaq Is Not Even Close to Recovery

The Nasdaq Composite Index’s all-time high, reached five years ago today, may become the American stock market’s version of the 1980 peak in gold or the 1989 high in Japanese shares.The index would have to more than double to surpass its record close of 5,048.62 on March 10, 2000, even after climbing 86% since October 2002. Stocks including Intel Corporation, the second-largest Nasdaq company by market value, and Cisco Systems Incorporated, the third biggest, will need to more than triple to exceed the peaks they reached during last decade’s “Internet bubble.”“Unless the world falls apart, we’ll get back to those highs,” said Chuck McQuaid, whose $14 billion Columbia Acorn Fund has returned 12% on average in the past five years, compared with a 16% average loss for the Nasdaq. “But who knows how long it will take?”Gold reached a high of $873 an ounce in January 1980 after more than doubling in 1979, reflecting concern that inflation would accelerate. The metal’s price dropped below $300 in June 1982 and hasn’t risen above $510.10 since then.In Japan, the benchmark Nikkei 225 Stock Average rose for 12 consecutive years as the economy surged as much as 8% annually and real-estate values soared. The benchmark peaked at 38,915.87 on December 29, 1989, and dropped in nine of the next 13 years. Yesterday’s close was 69% below its high.The Nikkei’s plunge from its record and the Nasdaq’s slide were similar, as both followed five-year stretches in which the benchmarks at least tripled.In the 1990s, speculation that the Internet’s emergence would spur demand for computer-related companies’ products and services fueled Nasdaq’s rally. Computer-related shares account for about 40% of the composite index’s value.The bubble burst as the optimism proved to be excessive. Companies such as At Home Corporation, a provider of Internet service over cable-television lines, went bankrupt. Stocks including JDS Uniphase Corporation, the world’s largest maker of parts for fiber-optic networks, lost more than 90% of their value.More than $7.6 trillion in wealth was wiped out. Merrill Lynch & Company’s Henry Blodget, an analyst who made his reputation by predicting a surge in Nasdaq-listed Amazon.com’s stock price, was banned from the brokerage industry.“When you get a major bubble, it takes a very long time to recover,” said John Bollinger, founder of Bollinger-Bands.com, from his office in Manhattan Beach, Calif. “People lose interest. They forget about the stocks.”The Dow Jones Industrial Average needed a quarter century to regain the peak that it reached in 1929, the year of the so-called Black Tuesday crash. The benchmark plummeted 90% before hitting bottom in July 1932, and didn’t close above its high until November 1954.The Nasdaq’s drop rivaled the Dow average’s. The composite index skidded 78% before bottoming at 1114.11 on October 9, 2002, more than 2 1/2 years after its peak. It has since rebounded 86%, closing yesterday at 2061.29.Shares of Intel, the world’s biggest computer-chip maker, have lost two thirds of their value since setting a record in August 2000. The stock closed yesterday at $24.84.Cisco, the largest maker of computer-networking equipment, has tumbled by more than three-fourths from its March 2000 high to its latest close of $18.53. At the peak, the company was the world’s biggest by market value.Microsoft, the only Nasdaq company more valuable than Intel or Cisco, would have to more than double from its close of $25.31 yesterday to revisit its all-time high. The world’s no. 1 software maker set the record, $59.56, in December 1999.In 2003, the Nasdaq rebounded 50%, about double the Standard & Poor’s 500 Index’s gain of 26%. The composite index rose another 8.6% last year, trailing the S&P 500’s 9% increase.This year, the Nasdaq has lost 4.7%. The S&P 500 is up 0.6% and the Dow average has gained 1.2%.The composite index may have an advantage over the Dow industrials in attempting to return to its record highs, said the president of Bianco Research LLC in Chicago, James Bianco.“A lot of the big companies went out of business and we can bring in a whole new class of stocks,” he said. The Nasdaq-100 Index, composed of 100 of the market’s largest nonfinancial companies, has 42 different members now than at the end of 1999.“If you delete all those 2000 busts, the new companies with new outlooks can power the Nasdaq higher,” Mr. Bianco said. By contrast, after 1929, the Dow’s members “didn’t disappear, and investors had to suffer through a re structuring of those companies. That took 25 years.”Google, the most-used Internet search engine, joined the Nasdaq Composite last year. The stock closed yesterday at $181.44, up 113% from the $85 price at which it was sold in August. Fourth-quarter profit at the company jumped sevenfold as sales topped $1 billion for the first time.The president of Oak Associates in Akron, Ohio, James Oelschlager, expects Internet companies like Google and eBay to spur a rally in the Nasdaq.The Internet “is extremely under penetrated,” said Mr. Oelschlager, whose White Oak Growth Stock Fund more than tripled between 1995 and 2000 before tumbling by more than half over the next two years. Advertising will drive revenue growth, he said.As for the bear market that kicked off the decade, “everybody was far too optimistic – companies and analysts with their projections and fund managers with how far stocks may go,” he said. Now “everybody is too negative.”Mr. Oelschlager predicted the Nasdaq will eventually reach a new high. “It’s just a question of when.”

Five Years After Peak, Nasdaq Is Not Even Close to Recovery

Five Years After Peak, Nasdaq Is Not Even Close to Recovery

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