Market Musings 06/09/20: The End of the Nasdaq Bull Run?

The End of the Nasdaq Bull Run?

Let me be clear - almost certainly not!

So in two days over Thursday and Friday last week, the Nasdaq 100 (as represented by the QQQ ETF) dropped a grand total of 6.3%. Now this might seem a large move downwards, but it is not really.

We should recall that, prior to this 2-day drop, that the Nasdaq-100 had gained an incredible 78% from the 23 March low. So as I said, a 6% fall is really not that much in this context.

Bear in mind this even after this pull back, the Nasdaq 100 (in blue) has gained 66% since the March market lows, compared with a measly 16% for the FTSE 100 (orange) and 47% for the S&P 500 ex Technology index (green). I think most investors would be ecstatic with a stellar return like that after just over 5 months!

Nasdaq-100 far ahead of S&P and FTSE 100

In addition, the Nasdaq implied volatility index, the VXN, had been signalling an expected rise in volatility, as the VXN itself had risen to a high level of 36 (compared with an annual average around 20 for calendar year 2019) even before this latest sell-off.

Nasdaq Volatility VXN has been rising

Lessons from recent(ish) history

For those of you with an investing memory that stretches back at least 20 years, you will no doubt recall another period when the Nasdaq was the standout equity investment globally, namely the late 1990s Tech-Media-Telecom market bubble and bust.

During this period, investors became hugely excited by the prospects for the nascent internet economy, as household internet access and usage of the world wide web really took off with the general public. Yes, it really was only just over 20 years ago!

Many commentators are comparing this current Nasdaq bull market to the late 1990s, which I feel is a little simplistic and actually unfair, even.

Why?

Point 1:

The scale and speed of the Nasdaq’s bull market in the 1990s is actually of a different order to today’s, as can be easily seen from the chart below, where I lined up the performance of the Nasdaq Composite index in the 1990s (ending in the March 2000 market top; in blue) to today’s bull market since 2009 (in green).

Nasdaq Composite: Comparing 1990s to 2009-

Starting in late 1990, the Nasdaq went up 15 times in 9½ years to its 2000 peak - a compound annual growth rate of 33% over this entire period. Thus far, the Nasdaq has gone up just under 9 times in 11½ years - a CAGR of 21%. Impressive for sure, but nothing like the 33% average posted in the 1990s.

Point 2:

We should recall the environment prior to the start of this fantastic Nasdaq bull market. Over the 9 years between March 2000 and March 2009, the Nasdaq Composite lost fully 75% of its value from the peak.

Nasdaq from 2000 peak to 2009 nadir

Indeed, it took over 15 years for the Nasdaq to regain its March 2000 level - this only finally occurred in April 2015.

Taken from the March 2000 peak level to today, the Nasdaq has compounded at a far less impressive annual rate of just 4%.

Point 3:

Any long-running equity bull market sees periodic pull backs and corrections. In fact this is a healthy process, as it helps to prolong the life of a bull market as it resets expectations somewhat and tempers over-exuberance.

As an example, over the mid- to late-1990s, the Nasdaq actually experienced 6 occasions where it dropped 10% or more prior to its 2000 peak - on average, about once every 8 months over this time span.

Nasdaq suffered 6 corrections between 1996 and 2000

Nothing is certain, but...

Of course, it is perfectly possible that we have seen the peak in this Nasdaq bull market, and that a protracted bear market lies ahead of us. But I would argue that, on the balance of probabilities, that a resumption of the bull market is more likely, given the ongoing recovery in the global economy, the strong profit growth in the large-cap technology names leading this advance, and the lack of attractive investing options in other large asset classes such as government and corporate bonds and cash.

That doesn’t mean that I would rush out to buy into Microsoft, Apple, Amazon, Alphabet or Facebook right now. But equally, I have not given up on investing in technology companies, where I am comfortable with the long-term growth drivers, the valuations and I see robust cash generation.

Back in the late 1990s close to the crescendo in the TMT bubble, investors seemed to have given up on traditional valuation and profitability metrics, and new unprofitable companies were coming to the market in ever-greater numbers. For now, I don’t see a widespread repeat of this phenomenon, although it is true that, like so many other people, I simply do not understand investing phenomena such as Tesla.

I would suggest that those looking to investing in US growth look more to small-caps as opposed to the mega-cap tech household names that dominate the Nasdaq (and S&P 500) today - just look at the dramatic under-performance of US small-cap growth names (represented here by the VIOG Vanguard Small-Cap Growth ETF) versus the QQQ since the beginning of 2019. There are certainly plenty of areas in the US stock market that have not performed at all like the Nasdaq 100 mega-caps, which might be more worthy of investors’ attention.

US Small-Cap Growth has badly trailed the Nasdaq 100 since 2019

If you are really determined to find a parallel between this Nasdaq bull run and that seen in the 1990s, I would hazard a guess that we are more like mid-1998 or early 1999 right now. So if we were to follow the 1990-2000 Nasdaq script, we could still see the Nasdaq double from here before finally peaking... Food for thought, at any rate.

Have a great week ahead,

Edmund