Our weeklong “Bubble 2.0?” series revisited the dot-com bust of 15 years ago and examines the similarities, differences and lessons for investors today.
The Nasdaq-100 surged to an all-time high this week, sending a chill through investors with vivid memories of the dot-com bust 15 years ago that wiped out trillions of dollars in wealth.
In 2002, after the last technology bubble popped, former Federal Reserve Chairman Ben Bernanke said the Fed couldn’t reliably identify an asset bubble. His predecessor, Alan Greenspan, tried to, making his infamous “irrational exuberance” speech of Dec. 5, 1996, but he missed the mark by a few years.
There will be another tech bust someday, and a lot of people will lose a lot of money. Does the recent run up in the tech-heavy Nasdaq-100 NDX, +0.09% which had a 53% weighting in technology as of Nov. 5, warn that a repeat of history is right around the corner?
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Read: Three investors share lessons from the 2000 crash | Tech veterans discuss Apple, Amazon and Google
Read: What IPO trends say about a biotech bubble and VC fundingRead: These 5 charts say the Nasdaq’s surge is different this time
The famous last words of any buyer at a peak are “It’s different this time. ” But investors can take some comfort knowing that is exactly what the following five charts seem to suggest.
The aggregate price-to-earnings ratio — a measure of how much investors are paying for earnings — for the Nasdaq-100 is less than a third of what it was at the peak of the 2000 tech bubble. In other words, investors may be paying a lot for tech stocks, but they’re getting a lot more for their money now, than they did 15 years ago.
The following chart shows that while the Nasdaq-100 has outperformed the broad market by a wide margin so far this year — it was up 11% through Thursday, while the S&P 500 was up 1.9% — revenues at its component companies are rising even faster. During the Nasdaq-100’s surge up to its peak in March 2000, sales-per-share had barely budged.
Another sign that investors are getting a lot more for their money is growth in dividends per share.
During the tech boom 15 years ago, many dot-com companies used whatever cash they had — and some they didn’t — to try to grow their brands. Now, many companies are rewarding their investors by returning some of their cash hoard to investors through dividends. The higher the dividend, the wider the safety net for investors.
Some investors might worry that the Nasdaq-100 has been rallying too far too fast, but the next chart shows it is rising at about the same rate as corporate profit growth. When the tech bubble was inflating in the late 1990s, the Nasdaq-100’s surge belied the decline in corporate profit.
The next chart shows how the pace of the Nasdaq-100’s current climb to new highs is much more leisurely than it was 15 years ago. As the saying goes, the candle that burns twice as bright burns half as long.
If the current rally is indicative of another technology bubble, the above chart may be of some comfort, as it suggests the pop won’t be nearly as loud — or costly.
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