The long road back
Despite heady gains, it will be a long time before investors see Nasdaq 5000 again
Timing is everything when it comes to investing. No one knows that better than Mitchell Rubin. Manager of the Baron iOpportunity Fund, Rubin had the misfortune of launching his technology portfolio a little more than a week before the Nasdaq composite index peaked above 5000 in March 2000.
"We had like five good trading days," says Rubin. Then the party came to a crashing end in a correction for the ages that would eventually push the index down as low as 1108 in October 2002.
Even profitable companies in Rubin's portfolio were brought back down to earth. EB ay, for example, lost nearly half of its market value in 2000. "There was absolutely no place to hide," says Rubin.
Recovery. For Rubin, patience would eventually pay off. By hanging on to some Internet leaders, his portfolio has recovered most of its losses from the tech sector's crash. Unfortunately, most tech investors can't say the same.
Wall Street will soon be celebrating the five-year anniversary of the bursting of the Internet bubble, when the "new economy" ran headlong into an old-fashioned grizzly bear. But while broader market measures like the Standard & Poor's 500 index of blue chip stocks and the Dow Jones industrial average have made up virtually all of their losses, the Nasdaq remains nearly 60 percent and nearly 3,000 points below its peak of 5048. "What sort of amazes me is that 2003 was a great year for technology," says Vincent Gallagher, managing director and portfolio manager for the Needham Funds. "I would have thought that having had that, it would have been a little closer to its old highs."
So much for high hopes. One explanation for why the Nasdaq is having so much trouble crawling its way back to 5000 may be that it never deserved to be there in the first place. "This was really the bubble of a generation, if not a century," says David Dreman, chairman and chief investment officer of Dreman Value Management. "It really ranks up there with tulipmania," he adds, referring to the 17th-century crash in the Dutch tulip bulb market.
The confluence of dot-com mania alongside the technology buildup stemming from fears over Y2K led to unprecedented capacity in the telecom and technology sectors. Because the Nasdaq is so much more concentrated in tech and telecom companies than are the Dow or S&P, it may take years for the index to return to its previous highs. Even if the index were to consistently return 20 percent a year--a big "if" --it would still take another five years for it to hit 5000 again. That's on top of the five years that have already passed. "For the index to get back to 5000 anytime soon, we would need to have some other fascination reminiscent of the Internet boom," says Louis Harvey, president of the financial-consulting firm Dalbar.
Realistically, says Chris Orndorff, head of equities for the asset management firm Payden & Rygel, "it could be another six or seven years before we're talking about Nasdaq 5000 again." While that's a long time by the standards of today's volatile markets, it's by no means unprecedented. It has been 15 years since the Nikkei 225 peaked at nearly 40,000, and the index of Japanese blue chip stocks is nowhere near its prior levels.
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