One Year After Peak, Nasdaq Looking Peaked

They say that for the one-year anniversary, paper is the appropriate gift.

For the one-year anniversary of the Nasdaq Composite Index’s all-time high, the almost unavoidable choice is a loss on paper.

On March 10, 2000 the Nasdaq hit its all-time high of 5,132.52 — an 88 percent increase from October 1st, 1999. Friday, the Nasdaq closed at 2,052.78. That’s a lot of distance to travel in 12 months.

Did anybody see it coming? In retrospect, yes, but few chose to pay much attention.

“During the bull market, there were always some people saying there’s going to be a huge drop in tech, but most people brushed them off,” Morningstar.com analyst David Kathman told the E-Commerce Times.

Don’t Believe The Hype

A year ago, denial and hype still ran rampant, despite the obvious warning signs. And although many pundits had already announced the imminent arrival of the dot-com shakeout, investors chose to ignore them.

“Last spring, people got caught up in the frenzy and in the hype,” Kathman said. “As long as a company had a cool idea and their revenues were growing fast, even though they were losing tons of money, people still threw money at them.”

But optimism has its limits, and once reached, the only way to go was down. Day after day last spring, investors woke up to a cold splash of reality as the dismal fourth quarter financial reports from e-tailers began trickling in.

What Goes Up …

A week after the Nasdaq’s all-time high, on March 16, 2000, Internet grocer Peapod announced that investors had yanked US$120 million in planned equity financing off the table.

Peapod’s share price plummeted as much as 55 percent in mid-morning trading. The Nasdaq fell as low as 4,455.10 that same day, and only a month later, on April 14th, it closed at 3,321.29.

“There was a correction of the frenzy,” Kathman said. “The bubble was popped in March and April as people began shaking their heads and coming to their senses. Cooler heads prevailed.”

… Must Come Way Down

If you’re looking for a simple explanation for what happened, you might not find it too easily. But here’s something for starters.

As the market began to go down on the onslaught of dismal financial news, fewer investors became brave enough to finance initial public offerings, and the venture capitalists became cautious. Not only had the dot-coms run out of cash, they now had no one left who was willing to refill their purse strings.

“A whole bunch of things conspired to build the bubble up, and then like a domino, caused it to deflate,” Kathman said.

The Real World

Although a year later, it may feel like the dot-com world suddenly crashed and burned, the truth is the Nasdaq’s descent was rather gradual over the course of a year.

Kathman said that the Nasdaq generally followed the same downward slide as e-commerce benchmark Amazon.com, with no real straight, steep drops.

High-tech investors looking for some solace on this special Nasdaq anniversary can turn to eBay, which has held up a great deal better then the Amazon’s or Priceline’s of the dot-com world. By consistently making money and expanding its margins, eBay may be proof that the stocks of e-tailers who follow traditional business basics can stick around for the long haul.

“Investors are definitely looking for results rather than just promises (now),” Kathman said. “People are demanding a real business now rather than just an idea.”