Nasdaq reached improbable peak 3 years ago today (for the "Bush's recession" folks)

On that Friday afternoon three years ago, millions of investors probably left work feeling pretty darn smart, smug and secure in their newfound riches.

The Nasdaq composite index, with its focus on technology stocks, hit its all-time high of 5,048.62 on March 10, 2000, after a remarkable 2,000-point run up over the previous four months.

It seemed the high-octane speculative energy that had propelled the Nasdaq into the stratosphere would last forever.

No one knew it then, but that Friday was actually the last day of one of the great bull markets in history and the beginning of one of the most vicious bear markets ever.

"Over the past three years, we have gone from an era of extreme exuberance and overconfidence to widespread glumness and no confidence," said James Stack, editor of the newsletter InvesTech Research and a market historian.

Since blasting above 5,000, the Nasdaq has lost three-fourths of its value, falling to about 1,300 and shattering the hopes and dreams of a generation of investors.

At its peak in March 2000, the market value of the nearly 5,000 companies listed on the Nasdaq was $6 trillion, compared with $1.98 trillion now.

"Many people mistakenly believed we had landed in nirvana in 1999 and 2000," said Richard Cripps, chief market strategist at Legg Mason Inc. in Baltimore. "When market psychology reaches such extreme bullishness, it is time to be cautious – if only we could learn that lesson."

The decimation of the Nasdaq was more of a process than a single event, and it occurred in three phases: First came the valuation correction in early 2000; then the period of economic concerns in 2001; and finally the crisis of confidence caused by corporate scandals, threats of terrorism and Iraq.

Beginning in 1999, at least a few market experts warned that stock valuations were too high. Money was flooding into stock mutual funds at a record pace – some $309 billion in 2000 compared with $188 billion the year before and $157 billion in 1998.

The signs of excesses were seen at every turn. Even the most cockamamie Internet idea could lure hundreds of millions of dollars in a public stock offering. For example, the stock price of Internet toy shopping site eToys Inc. quadrupled from $20 to $76.50 on its first day of trading in May 1999.

This meant that the company's market value was $7.7 billion, or 35 percent more than Toys R Us, which actually had real stores and real earnings. This company, along with hundreds of other former high-flying cyberrockets, later folded. More than 800 companies were delisted from the Nasdaq from 2000 through 2002.

A new occupation called day trading also flourished and accounted for about a quarter of the Nasdaq's trading volume. An industry trade group estimated that day traders held their stock positions an average of seven minutes.

At its peak, the price-to-earnings ratio of the Nasdaq was an outlandish 200. Historically, anything above the mid-20s is considered risky. The price-to-earnings ratio of the Dow in early 2000 was a more respectable 20 and not coincidentally its losses have been less than half that of the Nasdaq.

"At first when the bubble burst, it was simply a valuation adjustment," said Jim Weiss, head of Weiss Capital Management. "There were voices of caution, but they weren't paid attention to."

Technology investors received a cruel mugging in April 2000, with the Nasdaq suffering three of its worst days ever, losing about 1,000 points. No one knows for sure the actual catalyst for this initial collapse, but some market experts say some bad news about software giant Microsoft Corp. was the culprit.

Microsoft shares shed 14 percent of their value on April 3, 2000, after a federal judge ruled that the company may have violated antitrust laws. The Nasdaq has not been the same since.

"That started to take the air out of the bubble," said Hugh Johnson, chief investment officer at First Albany Corp.

After the first 1,000 points were lopped off the Nasdaq, the hope was that the worst was over. And in fact by mid-2000, the index had stabilized, and the "buy-on-the-dip" crowd was out in force again. That was unfortunate because the Nasdaq went into another steep slide during the fourth quarter of 2000 and the first quarter of 2001. The problem was the U.S. economy was slowing, and there were even fears of a recession. In other words, the valuation concerns had been replaced by economic concerns.

The economy, which had grown at a 5.5 percent clip for much of 2000, slowed to a 2.5 percent pace in the fourth quarter of 2000. The bears were betting that the economy would drift into recession, and it ultimately did in the first quarter of 2001.

The Nasdaq continued to drift lower during 2001 as hope faded for a quick economic recovery, or "soft landing." Both the economy and the Nasdaq were already in tatters when terrorists attacked the World Trade Center and the Pentagon on Sept. 11, 2001.

In the first trading days after the attacks, the index dropped below 1,500. But at that level – 70 percent below its high – some investors found the courage to buy stocks. Amazingly, in the aftermath of those attacks and the weak economy, the Nasdaq actually rallied back above 2000 by the end of 2001.

Mr. Weiss and others say the low reached after the attacks might have marked the end of the bear market if not for a third shock – accounting scandals. Some of the nation's largest companies, including Enron Corp., WorldCom Inc. and Global Crossing Ltd., were collapsing during 2002 under the weight of corporate scandals.

The final sell-off in the Nasdaq was triggered by a crisis in investor confidence caused by these scandals and the loss of integrity of Wall Street research, Mr. Weiss said.

"People were saying the game is rigged," he said. "Corporate managers were lying; the analysts were lying; they thought they might as well go to Las Vegas and at least have fun losing money."

With all these factors weighing on the market, the Nasdaq hit its bear market low of 1,114.11 on Oct. 9, marking a decline of 78 percent. Since then, the Nasdaq has been moving in a range between 1,300 and 1,500, basically stuck in neutral because of the uncertainty surrounding the potential war with Iraq.

The lessons to be learned from the collapse of the Nasdaq have been well chronicled, and many are obvious. Investors should diversify their holdings, have a clear understanding of what they are buying, and have realistic expectations of what stocks will return over long periods. While that's good advice, it's difficult to follow during periods of extreme bullishness, Mr. Cripps said. Investors tend to be held captive by their most recent experiences, either good or bad.

For example, in late 1999 and early 2000, as the Nasdaq continued to hit new highs, many investors and analysts just thought the bulls would run forever. When the market value of Cisco Systems Inc. hit $500 billion in early 2000, one Wall Street analyst wrote that the company might be the first valued at $1 trillion.

"When investor sentiment is extremely bullish like it was in early 2000, you have to lean against it with caution," Mr. Cripps said.

Investors should have been expecting change three years ago, because people were so optimistic.

"Going against the prevailing mood is difficult," he said. "Even when we see extremes, we just don't learn."

The question now is whether the Nasdaq has turned bearish to the extreme. In other words, should investors buck the current trend and be more positive?

"We believe some optimism is warranted," Mr. Cripps said. "The apocalyptic scenario now is the mirror image of the nirvana conditions being projected indefinitely three years ago."

Three years? When was Bush elected? Not that this matters to these folks, but doesn't this prove (yet again) that this is not Bush's recession?

Can't believe this topic wasn't posted already. Did I miss it in my scan?

Microsoft shares shed 14 percent of their value on April 3, 2000, after a federal judge ruled that the company may have violated antitrust laws. The Nasdaq has not been the same since.

Certainly only one factor, but a significant one. Why no mention that the judge did not rule in a vacuum: he was responding to a case argued by the Clinton Justice Department.....

Notice how the previous administration gets zero blame for any of this? The Media still refer to the '80's as the Decade of Greed and tie Reagan's name to it whenever they can. And yet an administration that was boastful of an outstanding economy with P/E's of more than 200 gets a free pass. I suppose my outrage reached its pinnacle too long ago to reignite my very real animosity towards all things Clinton.

I saw this in the New York times yesterday and wondered if anybody noticed that Clinton still had nearly a year to go in his presidency when the bubble burst. NYT even used the word bubble in its headline.

>>at what point does it become his economy?

It IS Bushes economy now...clearly it started under Clinton, also clearly, Bush has failed to do anything to help it so far...sure hope all those newly unemployed people remember that its all Clintons fault when election time rolls around...somehow, I doubt it.

at what point does it become his economy?

Certainly somewhere around two years would be the point where his policies should be in force. And I do agree that there is a way to go with the economy.

However, my point was that so many idiots claim that "as soon as Bush was elected the markets tanked" and that certainly is not true.

Your second point maybe true and all but we already know ad nausea, that there is a leftwing bias to the media; regardless, these silly debates are a waste of time for both sides and leaves Republicans on the defensive, complaining about Clinton again.

Bush's mistake was allowing Greenspan to stay, where as Reagan had Volker to institute a fed policy that made real estate a bad deal, i.e. he raised the cost of real estate investment, which in turn made business investment more competitive. Coupled with top rate cuts and deregulation, there were all kinds of basic industry (number one being telecom and cable television) that were unleashed which were just basic applications with existing technology, previously hampered by a poor investment climate and antiquated laws and regulations.

Bush's Team was and remains blind to the telecommunications industry that was wiped out no thanks to Clinton, and no thanks to Bush. Thus the so called New Economy, has yet to find a home.

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