It was the worst-performing major equity index in 2022 and, so far, it has been the best in 2023. Is the Nasdaq back? It is tempting to think so, especially after the meaty rally in stocks such as Meta Platforms (META:NDQ) and Microsoft (MSFT:NDQ) following their first-quarter results. In addition, the US (and probably global) bellwether for technology stocks is up by 18% from its autumn 2022 low and, arguably, on the cusp of a new bull market.

Equally, the Nasdaq is still trading 24% below its 2021 peak Some would say that a new bull run does not begin until the old peak is eclipsed and exceeded by 20%, and the Nasdaq is actually trading some 24% below is 2021 peak, so it is just as easy to argue that tech stocks are still mired in a bear market.

Been there, done that

Anyone who remembers the Nasdaq’s collapse of 2000-2003, after the dizzying bull market of 1998 to 2000, may be inclined to proceed with caution.

It is highly unusual for the leaders in the last bull market to be the leaders in the next one (the bear market usually ends when all hope has been abandoned).

The S&P 500 has gained $2.4 trillion in market cap so far in 2023 and just six stocks – Meta, Amazon (AMZN:NASDAQ), Apple (AAPL:NASDAQ), Netflix (NFLX:NASDAQ), Alphabet (GOOG:NASDAQ) and Microsoft – have generated $1.6 trillion, or two thirds, of those gains. It is open to debate how (un)healthy it is to be relying so heavily on such a select list of names, no matter how formidable their business models may look today.

The Nasdaq Composite managed nine rallies during the 2000-2003 bear market, which ranged from 8% to 45% and 11 to 105 days in duration. The aggregate gains across those nine romps came to 4,886 points but the index still fell by 3,935 points, or 78%, from peak to trough. It then took the Nasdaq until May 2015 to get back to its March 2000 peak.

That last stat is particularly telling, not least because it is possible to argue the Nasdaq bull market this time around was even more egregious than the one of 2000 to 2003, given the unfettered enthusiasm for meme stocks, Special Purpose Acquisition Companies (SPACs), initial public offerings, cryptocurrencies and a lot more besides.

Different this time

The run from the Nasdaq’s autumn low is 195 days old, so the good news is it already has more longevity than any of the 2000-2003 rallies. That may encourage investors to think that Nasdaq’s last pullback is more akin to the short, sharp bear markets of 1978, 1980, 1987, 1998 and 2020 rather than the soul-crushing slumps of 1973-74, 2000-02 and 2007-09 which saw the index lose 60%, 78% and 56% of its value, respectively.

There have been 12 bear markets in the Nasdaq since 1971.

On average they have lasted 340 days and shaved 38% off the index’s value. The current slump is now 525 days old and has cut 24% off
the benchmark.

Sceptics will therefore assert that there could still be worse to come, especially as the worst downturns have come after the most rampant advances and the index’s addition of 9,196 points in just 606 days in its last bull run does look like a classic blow-off top.

But tech is rallying. This may be in response to the sharp share price falls if 2022, which mean valuations are now more attractive, or fears of a recession and the search for relatively reliable earnings and cashflows or hopes for interest rate cuts later in the year. If the world returns to the low-interest-rate, low-growth, low-inflation mire which characterised the 2010s and early 2020s then you can see why tech could excel again, because such an environment places a premium on any firm that is capable of producing secular growth.

Equally, if a 40-year era of cheap energy, cheap money, cheap labour and cheap goods is over, and higher inflation and higher rates are with us to stay, then it is more difficult to argue that has worked before will work again, simply because the environment will be so different.

That backdrop would seem better suited to ‘jam-today’ cyclical stocks which could start to offer nominal rates of growth that mean there is no need to pay a premium valuation for perceived, ‘jam-tomorrow,’ long-term growth stocks. It could also persuade investors to lessen exposure to equities in favour of commodities and ‘real stuff,’ which by and large outperformed ‘paper’ assets in the 1970s.

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