The Nasdaq hit another milestone this past week. On July 2, 2024, the Nasdaq closed above 18,000. Unless there is a significant and quick turnaround, it looks like it will hit the 20,000 mark in the not-too-distant future.
With the Fed’s massive monetary inflation from 2008 to 2022, there is some justification for vastly higher stock prices. When there is more available money, prices tend to go up. This doesn’t just apply to consumer products like food and clothes. It also applies to stocks. In fact, sometimes the effects are more exaggerated with stocks, especially in today’s world where buying and selling happens with the push of a button and there are low or no trading fees.
Price inflation is not uniform, and it seems that stock investors have received a benefit from the inflation of the last decade and a half.
It is good to look back and see where this came from. I remember wondering if the Nasdaq would hit the 10,000 mark in early 2020. Then COVID hysteria hit and it looked like the market would be down, especially with some businesses forced to temporarily close or minimize business. Instead, we saw a massive infusion of new money from the Fed, and stocks turned around quickly and started hitting new highs.
The Nasdaq first went above the 10,000 mark on June 10, 2020. In other words, it has gone up 80% in about 4 years, and I already thought it was something of a bubble 4 years ago.
If we go back to December 2019, the Nasdaq hit the 9,000 mark. You can see the Nasdaq milestones here.
So, in less than 5 years, the Nasdaq has more than doubled. Have overall prices in other things doubled? That’s not the case according to the government’s statistics on the matter. Are corporate profits double what they were 5 years ago? Are they expected to be that much higher in the future? I am looking for some kind of justification other than loose money from the Federal Reserve.
The Original Tech Bubble
The really big Nasdaq bubble happened in the late 1990s. The Nasdaq went above the 5,000 mark in March 2000. It then fell for two and half years and went down to just above 1,100. It was down about 78% from its peak.
To put it another way, the biggest tech bubble in history saw the Nasdaq peak at just above 5,000 and then lose almost 80%. 24 years after that peak, we are now three and a half times higher than the peak in March 2000 when it was a giant bubble.
If we measure from the low in 2002, the Nasdaq is now over 16 times higher from that level. To be sure, the market probably oversold and overshot in the down direction during the bear market, but that’s not to say that can’t happen again.
What if the Nasdaq lost 78% this time? From a level of 18,000, a fall of 78% would mean we would see the Nasdaq at 3,960.
Can you imagine right now seeing the Nasdaq go down below the 4,000 level in the next few years? I don’t think most people can imagine the Nasdaq going down to 9,000 from here (a 50% drop).
Yet, if we are again in a massive bubble, why shouldn’t this be a good possibility? It has been an amazing bull market in stocks for the last 15 years. Maybe it will continue, even in the face of an inverted yield curve. But we shouldn’t discount the possibility of a major downturn, and history shows us what is possible.
This isn’t a prediction of what will happen. It is just a question for people to answer. If stock markets fall by 50% from here, are you ok with that? You don’t have to be happy about it, but will it cause you excessive stress or hardship?
What if the Nasdaq falls 80%? Are you ok with your current asset allocation if that turns out to be the case? It isn’t a question of whether stocks will crash and by how much. Nobody can predict that with any certainty. The question is whether you are prepared for such a thing to happen.