The NASDAQ and FTSE recover to levels last reached in 2000
03 March, 2015
Today the NASDAQ index recovered to levels it first reached 15 years ago, that's a long time to wait for a 0% return. Dare I ask — is it different now?
Yes, today the NASDAQ index finally recovered to the levels last seen in the dot-com boom. Back then such stocks were doubling every year and if you had told investors that their return would be zero even if they hung on for 15 years they would have told you that you didn't understand the new era of the internet.
While the broader S&P500 had recovered to new highs by 2006 the tech heavy NASDAQ index has taken a lot longer. Back in 1999 there was 457 new companies listed in mostly tech IPOs of which 117 doubled in price on the first day of trading, so things are a little different now.
What is different in the market from back then?
First of all, in terms of valuations, unlike the dot-com era when investors were buying Internet companies with promise but very little profit, today's gains are built on more solid earnings growth — with companies like Apple and Google providing most of the strength in that index. Valuations are still on the high side, but not nearly as high as they were back in 2000. The NASDAQ index trades on 32 times a year's earnings, whereas back in March 2000 it traded on 175 times.
Eight of the top 20 stocks in that index no longer exist, the standalone firms. Some of the ones that do, such as eBay back then it was trading at 3,000 times its annual profit and Yahoo was trading at 600 times. Today, those two are on multiples of 24 and 36, respectively. So valuations are a lot less challenging now than they were back then.
Information technology generally is contributing its share of earnings. In 2000 tech stocks were 33% of the overall market but contributed only 12% of the earnings, today they are much better in balance, they are about 20% of the market and contributing 19% of the earnings. Technology valuations are about middle of the pack. Healthcare and consumer stocks are a little more pricey on higher ratios.
The other thing to consider is the pace of gains is a lot slower, even though we've had some strong gains. In the two years leading up to the 2000 peak, the NASDAQ rose 189 percent and 50 of the stocks went up at least 10-fold. Although we've had good gains in recent years, in the last two years the index has risen 66 percent and there is not a single stock that has gone up more than the likes of 10-fold.
Didn't the UK FTSE index also recover to its 15 year highs over the last week?
Yes, the previous high for the UK index was reached on New Year's Eve in 1999. Since then the UK economy has almost doubled in size in sterling terms, but the sharemarket has obviously been flat since then.
If investors are a little bit frustrated by that, they will not like to learn that the best performing company in the UK index was British American Tobacco — which would not have been an obvious choice back in 1999, as all the focus was on technology. Yet it is up ten-fold over 15 years, despite cigarette consumption in the developed world being in a declining trend.
The big drag on the UK index over that time has been banks, which were so heavily impacted by the global financial crisis and also the big oil companies which have struggled. So these examples are not just a reminder of the importance of the starting point that you choose to invest but also the vast differences in outcomes depending on the stocks.
Are these the last markets to recover their lost ground from 2000?
Not at all, even though some markets recovered to their 2000 peaks pretty quickly, like Australia in 2004, many still have a long way to go. Take Japan for example, the Nikkei index hit 20,800 in 2000 and despite strong returns in recent years it is still 9% below that level. The Euro Stoxx 50 index is still only at 2/3 of the levels it was at in the year 2000. So there is still further to go in some parts of the world. We will keep you posted on progress as the rest of the world recovers!