Just How Terrifying Is a NASDAQ Crash?

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By Jacob Maslow

stock market tickerIt is really no surprise that many investors have mixed feelings regarding the NASDAQ crossing the 5,000 mark. On the one hand, they are happy because this indicates the huge gains of stocks that make up the NASDAQ composite. There has been a phenomenal appreciation in the technology sector, biotechnology, and medical device sectors. This progress indicates that the NASDAQ is more diverse and dynamic now than before.

You have to understand that, 15 years ago, the NASDAQ was primarily fueled by internet companies. A lot of these companies didn’t really have any profits. Most were just patched together to take advantage of the insatiable investor demand for any company having anything to do with the internet. There was a lot of hype. There was a lot of buzz, and very little on the ground to back up all that sky-high valuation. It would be safe to say that the first NASDAQ rally that ended with the composite hitting 5,000 was based primarily on air.

Nowadays, most of the technology companies that make up the NASDAQ composite show earnings. They are more solid. Also, the overall blend of companies that make up the NASDAQ composite is more diversified. Put all these factors together and you should gain some sense of reassurance that whatever happened after the NASDAQ first hit the 5,000 mark probably might not happen this time around.

What are people so scared about? Well, when the NASDAQ hit the 5,000 point 15 years ago, it promptly lost 80% of its value. This didn’t happen over the span of several years, but almost immediately after. It was really a scary ride. It was like riding a roller coaster, hitting the highest peak, and then all of a sudden dropping 80% of the way down. It scarred many investors. It really humbled a lot people’s exuberance. Just like with suffering any kind of trauma, it is easy to see why many investors are gun-shy and ambivalent about the NASDAQ hitting the 5,000 point.

As I have mentioned in a previous analysis, this NASDAQ is quite different from the previous NASDAQ composite of 15 years ago. The companies that are involved are different. The market dynamics have changed, and people are wiser now. Of course, this doesn’t mean that the NASDAQ will continue to rally. I strongly believe that there will be a correction. However, the speed and severity of the crash might be different this time around.

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