NASDAQ Market Cycles over the Last 30 Years
There has been major turmoil of some description during half of our tenures as investment advisors. And so, here we are again, writing another bear market essay to investors. We will skip standard and tired current events topics in favor of sharing a bigger picture insight: despite the pain of bear markets, investors are rewarded over the long-term to maintain a commitment to equity investments in high quality companies, defined as those companies with high returns on invested capital, conservative balance sheets, and operations that dominate an industry or define or occupy a niche. Such companies not only survive the economic melancholy that underlies bear markets but often emerge as even stronger competitors.
From historical price data accessible to everyone on Yahoo! Finance, it is interesting to note that the price index of the NASDAQ increased tenfold from early 1991 to early 2000. In the late 1990s there was an explosion of IPOs, most of which do not exist today. Then the Federal Reserve started raising rates, international tensions rose after 9/11, and there was a mild recession.
Similarly, there was a tenfold increase in the price index of the NASDAQ from late in 2008 to late in 2021. In 2020 and 2021 there was an explosion of SPACs and lower-quality IPOs, most of which we do not think will exist in the future. Then the Federal Reserve started raising interest rates, international tensions rose after Russia invaded Ukraine, and we are pretty sure we are technically in a mild recession rolling from one sector to another.
NASDAQ Index Price Range (i)
The “past as prologue” implications are a bit unsettling. The NASDAQ spent more than ten years below the highs of the early 2000s, and the next tenfold increase started from a level approximately half the early 2000 high. Yet, some of the best investment outcomes came from those companies that touted high revenue growth in the 1990s and have matured into steady dividend growth companies. Of course, there were precious few companies that reinvented themselves between NASDAQ bull decades that were considered high growth companies in both periods. One notable example, Microsoft, rode the first bull decade on the explosive growth in desktop computers, along with the likes of Hewlett Packard, Dell, and Compaq. Desktop computers were certainly not part of the excitement of the second bull decade. However, Microsoft reinvented itself and rode the new wave of cloud computing, which we would assess as still in the early innings of growth. Books will be written, and case studies will be taught about outlier companies that grew rapidly in both periods, but it is just as important to acknowledge the large portion of companies that did not transition so well.
The glaring implication is that the stocks perceived as stalwart growth stocks of the last decade may spend this decade sputtering in a transition as they become mature companies. Can you imagine a stock market not dominated by Tesla, Facebook, Amazon, Apple, Netflix, and Google? Can you imagine it being 2029 and saying “Wow, Apple’s stock has not done much since 2021!” Or “It makes sense that Apple’s stock has not done much since 2021 because it is one of the largest companies in the world and its products and photo/video storage are awfully tough on the environment.” It is hard, but we are embracing this possibility because doing so removes complacency and sharpens our search for the next areas of long-term growth. We are certainly reviewing what worked well in the period between the two NASDAQ bull markets. Better yet, we seek out the characteristics of companies that consistently grew throughout the last thirty years, to find the companies we can own for the next 30 years, and the multiple bear markets that will likely occur during those years.
Redmond Asset Management, LLC October 2022
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC (RAM) is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on 22 Dec 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors