Nasdaq closes out its first four-quarter slump since dot-com crash

A lot has changed in technology since the dot-com boom and bust.

The internet goes mobile. Data centers are moving to the cloud. Cars now drive themselves. Chatbots have become smarter.

But one thing remains. When the economy turns, investors rush out. Despite Thursday’s angry rally, the tech-laden Nasdaq finished in the red for the fourth straight quarter, marking its longest streak since the dot-bomb period of 2000 to 2001. The decade’s history dates back to 1983-84, when the video game market crashed. .

This year is the first time the Nasdaq has fallen in all four quarters. It fell 9.1% in the first three months of the year, followed by a second quarter decline of 22% and a third quarter decline of 4.1%. It fell 1% in the fourth quarter following an 8.7% decline in December.

For the full year, the Nasdaq is down 33%, its steepest decline since 2008 and its third-worst year on record. The decline of 14 years ago occurred during the financial crisis caused by the housing crisis.

“It’s hard to be positive about technology right now,” Gene Munster, managing partner of Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You feel like you’re missing something. You feel like you’re not getting the joke.”

Other than 2008, the only other worse year for the Nasdaq was 2000, when the dot-com bubble burst and the index fell 39%. Early dreams of the internet taking over the world evaporated. Pets.com, best known for its sock puppets, went public in February of that year and shut down nine months later. EToys, which held an IPO in 1999 and saw its market cap rise to nearly $8 billion, collapsed in 2000, losing nearly all of its value before filing for bankruptcy early the next year. Delivery company Kozmo.com never achieved an IPO, filing in March 2000 and withdrawing its offering in August.

Amazon worst year in 2000, down 80%. Cisco fell 29% and then another 53% in the following year. Microsoft fell more than 60% and Apple more than 70%.

The parallels for today are quite clear.

In 2022, the company was previously known as Facebook lost about two-thirds of its value as investors disputed its future in the metaverse. Tesla fell by the same amount, as automakers valued as much as tech companies collapsed into reality. Amazon is down by half.

This year’s IPO market is flat, but many companies that went public last year at astronomical valuations have lost 80% or more of their value.

Perhaps the closest analogy to 2000 is this year’s crypto market. digital currency Bitcoin and ether fell by more than 60%. More than $2 trillion in value was wiped out as speculators fled crypto. Many companies went bankrupt, especially the crypto exchange FTX, which collapsed after reaching a valuation of $32 billion at the beginning of the year. Founder Sam Bankman-Fried is now facing criminal fraud charges.

The only major crypto company traded on Nasdaq is Coinbase, which went public last year. By 2022, the stock is down 86%, wiping out more than $45 billion in market cap. In total, Nasdaq companies have lost $9 trillion in value this year, according to FactSet.

At its peak in 2000, Nasdaq companies were worth about $6.6 trillion, and went on to lose $5 trillion when the market crashed in October 2002.

Despite the similarities, it’s different now.

For the most part, the collapse of 2022 has less to do with businesses disappearing overnight and more to do with investors and executives waking up.

Companies are down and re-evaluated after a decade of growth fueled by cheap money. With the Fed raising rates to try and control inflation, investors have stopped putting a premium on rapid unprofitable growth and started demanding cash generation.

“If you’re just looking at future cash flow without profits, it’s a very good company in 2020, and it’s untenable right now,” Shannon Saccocia, SVB Private’s chief investment officer, told CNBC’s “Closing Bell: Overtime” on Tuesday. “The technology is dead narrative may be there for the next few quarters,” Saccocia said, adding that some parts of the sector “will have a light at the end of this tunnel.”

The tunnel he describes is continued rate hikes by the Fed, which can only end if the economy goes into recession. One scenario disrupts many technologies, which tend to develop when the economy is in growth mode.

In mid-December, the Fed raised its benchmark interest rate to a 15-year high, lifting it to a target range of 4.25% to 4.5%. The rate was close to zero through the pandemic as well as in the years following the financial crisis.

Tech investor Chamath Palihapitiya told CNBC in late October that more than a decade of zero interest rates “perverted the market” and “allowed manias and asset bubbles to build in every part of the economy.”

Palihapitiya took as much advantage as possible of cheap money available, pioneering investment in special purpose acquisition companies (SPACs), empty-check entities that hunt companies to take public through a reverse.

With no yield available in fixed income and with technology attracting stratospheric valuations, SPACs are on the rise, raising more than $160 billion in US exchanges by 2021, nearly double the previous year, according to data from SPAC Research. That number dropped to $13.4 billion this year. CNBC’s Post-SPAC Indexamong the largest companies to debut through SPACs in the past two years, they lost two-thirds of their value by 2022.

Predicting the bottom, as all investors know, is a fool’s errand. No two crises are the same, and the economy has changed dramatically since the housing collapse of 2008 and even more since the dot-com crash of 2000.

But some market prognosticators expect a big rebound in 2023. Loup’s Munster said his fund holds 50% in cash, adding, “if we think it’s at the bottom, we’ll distribute it today.”

Duncan Davidson, founding partner of venture capital firm Bullpen Capital, also expects more pain. He looked at the dot-com era, when it took two years and seven months to go from peak to trough. As of Friday, it has been more than 13 months since the Nasdaq hit a record high.

For private equity investors, by 2023, “I think we’re going to see a lot of cheap basements for companies,” said Davidson, who started investing in technology in the 1980s. To reach the bottom of the market, “maybe another two years,” he said.

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