Nasdaq record high: Then and now
Fifteen years after peaking during the dot-com boom, the Nasdaq composite has reached a new all-time high.
But this isn't the Nasdaq of Pets.com and Webvan, when companies were valued on "cash burn rates" and "eyeballs".
This Nasdaq, while still focused on technology companies, is a little more diversified than it was back then. And while the index, which tracks 2,500-plus stocks, has been steadily climbing since 2011, its ascent isn't the crazed surge that preceded its last record close.
As the tech-mania took hold, investors pushed up the prices of all kinds of internet-related stocks. Some were never profitable and disappeared. Others, like Priceline.com and Amazon, have survived and prospered.
Now the index has clawed back. It has ridden a six-year bull market for stocks to close at 5,056.06 on Thursday, surpassing its previous record closing high of 5,048.62, reached on March 10, 2000.
The index ended the day up 20 points, or 0.4 per cent, and has climbed 7 per cent this year, by far the best performance among major US stock indexes.
The headline number aside, the Nasdaq today is very different from the index and the overall market at the height of the technology boom, says Karyn Cavanaugh, a senior market strategist at Voya Investment Management. Investors have much more measured expectations of companies' future earnings compared with the frenzied dot-com years.
During the boom "everybody was buying stocks, the cafeteria people were talking about their stocks," said Cavanaugh, adding that now, "I don't feel there's the same frothiness. If it's a party, it's one of the most subdued ones I've ever been to."
There's another caveat to consider. Taking the effect of inflation into account, the index would have to reach 6,908 to match its highs from 15 years ago.
Here's a closer look at the Nasdaq then and now:
The Nasdaq's current rise has been driven by technology and health care. In a slow-growth world, investors favour industries where earnings will be better than average. Tech stocks are poised to benefit as companies increase their spending on equipment and software to cut costs and improve productivity. Health care stocks have been climbing as investors bet that biotechnology companies will discover the next blockbuster drug.
Together, tech and health account for almost two thirds of the Nasdaq's market value.
One stock in particular holds sway over the Nasdaq: Apple. Its market value has surged to more than $750 billion from $22.5 billion in March 2000. The company accounts for 10 percent of the Nasdaq's value.
Powered by tech and health care, the Nasdaq has climbed 22 percent over the past year, a more tempered rise than the 109 percent surge in the year before its last peak in 2000.
The Nasdaq had a much heavier tech-focus in 2000. At their peak, tech stocks made up 65 percent of the index compared with 43 percent today. Telecommunication companies were also a big component, accounting for 12 percent of the index's market value versus 0.8 percent now.
The biggest stock in the index was Microsoft with a market valuation of $525 billion. Apple had yet to release the iPod, iPhone or the iPad.
HOW EXPENSIVE ARE STOCKS?
The price-earnings ratio of the Nasdaq, a measure of how much investors are willing to pay for every dollar of earnings the companies in the index generate, is 21.
When the Nasdaq was at its highest, its price-earnings ratio reached 194.
BROADER STOCK MARKET
Both the Standard & Poor's 500 index and the Dow Jones industrial average are trading close to record highs from last month. The stock market is being underpinned by solid company earnings and optimism that the economy will continue to strengthen gradually.
The S&P 500 was also surging in 2000, rising with the internet bubble. The S&P 500 peaked at its then-record close of 1,527.35, on March 24, 2000. The Dow closed at a record of 11,722.98 on January 14, 2000.
Apple is the titan and Microsoft is a distant second with a market value of US$356 billion. Google, Amazon and Facebook round out the top five. The top 20, however, also includes Starbucks, pharmacy benefits manager Express Scripts and retailer Costco.
When the Nasdaq reached its record in 2000, Microsoft was the biggest company in the index. Cisco, Intel, Oracle and Sun Microsystems completed the top five. The biggest 20 companies in the index were in technology or telecommunications.
The United States economy is slowly recovering from the financial crisis and Great Recession. Even with a slowdown in growth to 2.2 per cent in the final quarter of last year, many economists forecast an expansion above 3 per cent in 2015. Hiring is picking up and the unemployment rate, now at 5.5 per cent, is falling. Economists expect steady, if not spectacular growth.
The Federal Reserve is still trying to bolster growth. Interest rates are close to zero, and while many economists expect that Fed policy makers will start raising rates later this year, the pace of increases is likely to be steady.
Optimism over the economy was high. The Federal government had recorded its largest budget surplus in nearly 50 years in 1998. At the end of 1999, the US economy grew at a rate of 7.1 per cent, and the unemployment rate stood at 4 per cent. The first chapter of the Economic Report of the President, published in February of 2000, was entitled "Sustaining a Record-Breaking Expansion".
The Fed's benchmark interest rate was at 6 per cent, close to its highest in almost a decade.
Company earnings have been rising steadily since the Great Recession and are at record levels. But there are signs that, after six years of growth, they may be starting to stagnate. Earnings per share for the average S&P 500 company are forecast to end 2015 little changed from a year earlier, according to S&P Capital IQ.
Company earnings surged in 2000. The average S&P 500 company increased its earnings per share by almost 12 per cent. The hangover came a year later though, when earnings slumped by 19 per cent.
- Steve Rothwell/AP