On Monday, the tech-heavy Nasdaq Composite closed above the 5,000-point level for the first time since March 2000.
As a result, the exchange is now within spitting distance of its all-time closing high of 5,048.62 and intraday high of 5,132.52, which were hit right before the dot-com bubble burst.
In the month of March, no less.
Does that scary coincidence mean the Nasdaq is setting up for another epic crash and burn?
And if not, how much higher can we reasonably expect the Index to rise?
The answers might surprise you…
Dear, Investors… It’s Just a Number
The Nasdaq’s return to dot-com glory levels naturally brings out the naysayers.
For instance, Janus Capital’s Bill Gross told CNBC this week that the Nasdaq hitting 5,000 represents a “little bit of a bubble.”
But should we really expect anything less than pessimism from a dyed-in-the-wool bond investor? Calling stocks attractive runs counter to his makeup and business pursuits at his new firm!
Regardless, any fearmongering (or hype) surrounding the 5,000-point milestone ignores one key fact…
There’s nothing fundamentally significant about 5,000. We’re talking about a purely symbolic and psychological level.
Now, sure… I’ll accept that sentiment influences investors’ actions. But all-time highs aren’t anything new. In fact, they’re actually kind of a requirement for markets that trend higher over time… which they do!
In fact, the Nasdaq’s fellow major indexes – the Dow and S&P 500 – have hit new, all-time highs with regularity over the last year. So the Nasdaq is playing catch-up, and its high this week was long overdue.
So let’s keep the focus squarely on the actual fundamentals that are driving the rally – and whether or not they’re likely to continue – instead of obsessing over an arbitrary number, or fretting about dot-com-bubble history repeating.
Quoted in the Los Angeles Times, John Lonski, Chief Capital Markets Economist at Moody’s Analytics, says, “[The Nasdaq] doesn’t resemble the speculative excesses that were in effect when it last set a record high.”
Speaking of which…
Three Factors That Will Propel the Nasdaq to Record Highs
We can attribute the Nasdaq’s return to 5,000 to three key factors. And if they continue, it’s reasonable to expect the rally to do likewise.
Nasdaq Catalyst #1: The Fed
“The Nasdaq wouldn’t be here if not for quantitative easing. It wouldn’t be here without zero-percent interest rates.”
So says Peter Schiff, CEO of Euro Pacific Capital.
I don’t typically agree with Schiff. But I do in this case… at least partially.
The Fed’s easy money policies have certainly inflated asset prices. Tech stocks included.
But it’s a bit of a stretch to claim that the Fed has manufactured the Nasdaq’s rise to 5,000. Especially given a much more obvious and powerful catalyst at work…
Nasdaq Catalyst #2: Tech Is Everywhere!
From communications to healthcare, banking to shopping, energy to automobiles… is there any corner of the market that isn’t increasingly influenced by technology?
With that in mind, the Nasdaq’s climb to 5,000 is more emblematic of technology’s maturation and dominance in everyday life – for consumers and businesses alike.
Consider that the technologies that were dreamed about during the dot-com era – and which received too much premature funding – have now finally come to fruition and flourished.
As Kevin Kelly, Chief Investment Officer at Recon Capital Partners, points out, the Nasdaq’s rally is “showing the robustness of America’s intelligence and innovation.”
Indeed! And the increasing real-world value of both, too.
Nasdaq Catalyst #3: Apple
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Since we’re on the topic of tech ubiquity, Apple (AAPL) reigns supreme as the poster child for it.
If you don’t own an Apple device, it’s probably because you live in an emerging market and can’t afford one yet. Or maybe you’re just anti-Apple.
Regardless, we can’t underestimate the significance of Apple becoming the world’s largest and most profitable company, based on its most recent quarterly report.
The company now comprises a remarkable 10.1% of the Nasdaq , compared to a mere 0.2% at the Index’s record high in 2000.
Simply put, as Apple’s stock goes, so goes the Nasdaq. And Apple’s been going pretty well lately, thanks to its above-average growth rates. The stock is up 74% (and counting) over the last 12 months.
The Case for the Rally Continuing
Like I said, continued momentum for the Nasdaq hinges upon the three catalysts above.
Let’s assess each one…
The Fed: Will the bank keep inflating asset prices? Most likely. Despite removing the key policy language of “considerable time,” Fed Chair Janet Yellen pledged to be “patient” on raising interest rates.
“Dovish” to “less dovish” is still positive for stocks in general – and, by extension, the Nasdaq.
Tech: Will America keep innovating and commercializing new ideas? Absolutely! I see it on a day-to-day basis, as I meet with the country’s newest innovators.
If you need a data point to hang your hat on before believing the same, try this:
Patent filing applications by U.S. companies and citizens increased by 7% in 2013 (the most recent data available). That’s enough to help the United States retain the top spot in the list of the world’s most innovative countries, based on patent grants.
Apple: Will Apple keep leading the way? You bet! There’s nothing holding the company back from more domination.
But the next question becomes, “How high can the Nasdaq reasonably go?”
Interestingly, not only have the S&P 500 and Dow hit new all-time nominal highs, they’ve also exceeded inflation-adjusted 2000 highs.
As for the Nasdaq? Not so much.
The Index would need to rally to about 6,900 – 38% higher – to achieve the same feat.
Now, let me be clear: I’m not offering the inflation-adjusted level as my prediction of where the Nasdaq is heading with certainty. Rather, it’s to provide perspective that there’s still ample room to run.
That’s especially true when we take valuations into account.
During the final days of the internet boom, the Nasdaq traded at an eye-popping P/E ratio of 175. Today, it sports a P/E of 23.
Granted, that’s a premium multiple to the S&P 500, which currently trades at a P/E of 19. But the Nasdaq has always commanded a premium multiple because of its perceived high-growth potential, so this isn’t unusual.
Bottom line: It’s taken 15 years for the Nasdaq to reclaim the 5,000-point level. But this time around, the fundamentals suggest the rally is far from overheated.
Ahead of the tape,
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