Debate Rages Behind the NASDAQ’s Return to the 5,000 Mark

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By Jacob Maslow

aspire to skyThe last time the NASDAQ 500 reached the 5,000 level was around fifteen years ago. We’re talking about the dot-com crash. This was seriously bad news because a lot of American investors saw their net worth evaporate overnight. Trillions of dollars of stock market value vaporized almost overnight. You have to remember that right after reaching the 5,000 mark, the NASDAQ went on to quickly lose 80% of that value. That is such a scary and steep drop that it has basically scarred many analysts for life. You really can’t blame a lot of Wall Street analysts and observers for feeling a little bit apprehensive and scared now that the NASDAQ 500 has again crossed the 5,000 threshold.

Are things so markedly changed this time around that we should completely blow off this threshold? Is the market dynamics and the psychology behind it so fundamentally transformed by both the great financial crash of 2008 and the dot-com bubble bursting that we should worry less? Unfortunately, the answer isn’t clear-cut. I wish it was. A lot of the answer would turn on what truly is driving the NASDAQ’s rapid increase in valuation.

There are a lot of theories. Primarily, it is due to the fact that a lot of highly valued companies are in the NASDAQ 500. Apple, Starbucks, Priceline, and Amazon are in the NASDAQ 500. Those companies are solid gold companies. After all, Apple just released quarterly earnings that are some of the highest since human history. The same goes, to a much lesser extent, with Amazon. Put all these factors together and it is no surprise that the NASDAQ is having such a great time. It would be nice if the explanation was that simple.

The 800-pound gorilla in the room of course is the fact that equities market, not just in United States but in Tokyo, the European Union, and, to a lesser extent, markets all over the world, are overly stimulated by cheap money. You only need to look at the US Federal Reserve’s policies of quantitative easing and near zero interest rates to understand what I’m talking about. With all this cheap liquidity, which was originally intended to stimulate real economic activity, flooding financial markets, it is no surprise that some of them would find their way back into stocks. With all these cheap money, good investments tend to become easily overvalued, and a lot of cash ends up being put on riskier stocks. Since the NASDAQ tends to be weighted more towards biotechnology and technology companies, there’s a lot of risk in that sector of the market. Thanks to the sky-high valuations, it’s not a surprise to see the NASDAQ appreciate to its current level.

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