Could The Nasdaq Suffer Another Dot-Com-Type Crash?

Image of statue of a bullThe Nasdaq PowerShares QQQ Trust (NASDAQ:QQQ) closed at all-time highs on Friday, but unlike the dot-com era that featured many unproven and unprofitable companies dominating the index, this time actually is quite different.

First, let’s recap a bit of trainwreck history, courtesy of MarketWatch:

We all know how things ended up in 1999, as the dot-com boom was at its peak. Stocks rose. In fact, the tech-heavy Nasdaq, which was teeming with hyperinflated stocks like Pets.com, rallied for three months, gaining about 24% to a peak of 5,048 on March 10, 2000, before the dot-com craze soured.

From March 10, 2000, the Nasdaq gave up more than a third of its value to hit 3,321.29 on April 14, 2000, according to FactSet data. Thereafter, a lot of volatile trade would follow, which would swing the Nasdaq up and down. Ultimately, it was the start of an ugly downtrend for the index — and stocks overall.

The dot-com era was dominated by high-flying companies that quickly crashed and burned. Investors were all too eager (read: greedy) to be a part of the tech boom, and simply bought everything in sight. Gains begat more gains. Everyone from the mailman to the trashman was touting the tech stocks they held in their portfolio.

No one worried that valuations had spiraled out of control.

Fast forward to today, and the valuations of Nasdaq-traded names are way lower. Currently, Nasdaq stocks have a price-to-earnings (P/E) ratio of about 21. Back in 1999, that metric was a sky-high 72. The Nasdaq is now dominated by mature tech titans rather than starry-eyed fledglings.

It’s taken the Nasdaq more than sixteen years to recapture its all-time highs previously set in early 2000. It was a slow crawl back to the top with many bumps along the way — a much healthier method of growth than the first time around.

The QQQ rose $0.23 (+0.20%) to $117.43 per share in premarket trading Monday. The benchmark tech index has gained 4.77% year-to-date.

QQQ-2016-08-15

You are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)

Powered by WPeMatico