Over the past decade, the Nasdaq 100 has risen nearly 20% per year.
From the March 2009 low, Q’s are rising 22% per year! That’s more than a decade and a half, with annual returns that would make Warren Buffett blush.
This was a magical bull market run.
We all know why. The ten largest stocks now make up more than 50% of the index. You know the names.
Clearly, the bubble talk is at a fever pitch right now.
Bubbles are difficult to define. You can’t just go through a checklist, because it is largely a combination of valuations, expectations and emotions. It is quantitative and qualitative.
While the numbers don’t tell the whole story, I wanted to see what this cycle’s returns look like compared to some of history’s other great bubbles. So I looked at total returns during the Roaring 20s1Japan in the 1980s and the Internet bubble in the 1990s, to see how the Nasdaq 100 has evolved over the past decade.
I’m not going to lie – the numbers are somewhat worrying:
We’re not yet at the level of the dot-com nosebleeds, but the past decade is right in line with Japan and the Roaring Twenties.
I didn’t expect the returns to be so close.
Each of those other cycles ended in tears with a huge crash.
Are we ready for that again?
Don’t know.
A crash is always possible.
Some context is probably needed beyond the fact that today’s tech giants are the best companies the world has ever seen.
After the dot-com bubble burst, the Nasdaq collapsed by more than 80%. Between 2000 and 2008, the Nasdaq 100 fell a total of 50%, which equates to a loss of -8% per year.
From 2000-2013, the total return for the Nasdaq 100 was a gain of 1%. Not 1% per year. That’s 1% in total for 14 years. A lost decade and then some.
Annual returns for the Nasdaq from the early 2000s to the present are just 8.4% per year.
That’s combining a brutal bear market with a banana bull market. Is that a full market cycle? 2000 was the height of the dotcom bubble, so it’s hard to say for sure.
Any way you measure it, tech stocks are on edge. This is one of the biggest bull markets we’ve ever seen.
So what now?
We could see a crash. I wouldn’t be surprised if expectations have gotten too far ahead of fundamentals. This happens during periods of rapid innovation.
I feel much more comfortable predicting lower returns for tech stocks in the future than predicting an impending crash from now. That may feel like an excuse. You could have claimed the same low returns many times over the past decade, but that didn’t happen.
Technology stocks cannot continue to grow at 20% per year indefinitely. I can say that with confidence.
Furthermore… maybe this is just like old times, or maybe this time it is different.
Concentrating your wealth in technology stocks has been delivering incredible returns for years.
I am convinced that diversification will be necessary at some point.
I don’t know when.
But that’s why you diversify.
Further reading:
Is this 1996 or 1999?
1Technically, the Roaring Twenties begins in 1921, as there was a bear market and recession in 1920-21. Close enough.
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