Karishma Vanjani
March 24, 2000, when stocks peaked during the internet bubble, was a watershed moment in financial history. A wave of euphoria gave way to selling that wiped out trillions of dollar in market capitalization, leaving investors poorer, but perhaps wiser.
The S&P 500 hit a record closing level of 1527.46, only to lose half its value by Oct. 9, 2002. It took seven years and two months for the index to hit bottom and return to its peak, the Dow Jones Market Data team calculates.
A spectacular rally on Wall Street, driven by the first internet companies, nearly tripled the value of the index from when the Silicon Valley sensation Netscape hit the public markets in August 1995. The market capitalization of the tech-heavy Nasdaq Composite gained more than 400%, while the Nasdaq-100, composed of the 100 biggest stocks in the index by market cap, rose 732%.
As usually happens when a prolonged phase of market euphoria ends, investors were left with some hard lessons. One was a classic: Diversification matters, a lot. A person who was mostly invested in Cisco Systems and other tech juggernauts of the time took longer to recover than a traditionally balanced investor with 60% in stocks and the rest in bonds.
Invesco's QQQ exchange-traded fund, which tracks the Nasdaq-100 index, took 16 and a half years to get back to its record high, while the Vanguard Wellington Fund Investors, the U.S.'s oldest balanced fund, took nearly three years. The Wellington fund also hit its peak more than a year after the S&P 500 did.
Investors focused on any particular sector -- be it housing or tech -- are bound to face greater risks, a lesson that makes the S&P 500's current concentration look scary. More than 32% of the index is driven by seven tech stocks that have gained from the rise of artificial intelligence -- Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla -- up from 27% over four years ago.
Even though it took years for the market to recover, the economy only suffered a brief recession. As defined by the National Bureau of Economic Research, the downturn only lasted from March to November 2001, beginning well after the market had decisively turned south. It highlights how slow the economy can be to respond to stock market selloffs.
By the time the peak in the business cycle occurred, "the index had already lost 24% (... well on its way to an eventual 49% decline)," wrote Doug Ramsey, chief investment officer of the Leuthold Group. But now, "given the prominence of the wealth effect over the last couple of years, it's hard to fathom the economy not succumbing pretty quickly to a declining stock market," he added.
The "wealth effect" is the idea that households spend more and stimulate the economy as the stock market rises. Households' net worth rose to a record $169 trillion in the fourth quarter, with gains coming from directly and indirectly held corporate equities. An NBER paper in 2019 concluded that for every dollar of increase in stock market wealth, consumer spending rises by 2.8 cents a year.
Last, but not least, it is worth remembering that bubbles are simply a feature of the market landscape. Investors are certain to encounter such episodes every handful of years, with more minor bubbles than major ones.
A positive signal for the market today is that returns have been nothing like what happened in the late 1990s. Since November 2022, when ChatGPT was publicly released -- a reasonable time to assume for the start of the AI boom -- the S&P 500 is up 45%. That is about one-fourth of the gain seen before the dot-com crash.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 24, 2025 16:37 ET (20:37 GMT)
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