The Argument for Innovation as the Root Cause of the NASDAQ’s Return to 5,000

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By Jacob Maslow

Nasdaq times square headquartersThe core debate behind the NASDAQ’s return to the 5,000 mark turns to cheap liquidity or innovation. These are the two main reasons being proposed for causing the NASDAQ to reach the 5,000 mark.If you’re a little bit worried about the NASDAQ hitting this psychologically important mark, you are not alone. After all, the last time the NASDAQ hits this mark, the global economy crashed. Thankfully, it was a relatively short crash. However, a lot of the decisions made during the dot-com crash carried over to the even greater crash in 2008. A lot of analysts are saying that due to the fiscal policy decisions of the US Federal Reserve and central banks like the Bank of Japan and the European Central Bank, the next crash would be even more devastating.

While this all sounds scary, you have to remember that we’ve been here before. The great Asian financial crash of 1997 only managed to sink the economies of Southeast Asia, but the contagion didn’t extend beyond Asia. Wall Street continued to hit record highs. The European markets continued to do well. However, the patterns and financial market interrelationships caused by the dot-com crash might not have been completely exorcised from the global financial machine.

This is why it’s really important to understand the arguments on both sides as to why NASDAQ returned to the 5,000 mark. One of the most convincing arguments is that the huge amount of cheap stimulus money issued by central banks is the reason why the NASDAQ is behaving the way it is. The counterargument is that there is a high level of innovation by technology companies, and that’s why we are where we are. This is really believable if you look at Apple. Apple is the poster child of NASDAQ innovation. Thanks to its breakthrough products like the iPod, the iPad, and iPhone, the company built by Steve Jobs is now worth more than $700 billion.

With that said, the NASDAQ has hundreds of companies and most of them can’t hold a candle to Apple. You have to understand that Apple is still constrained by the price per earnings ratio rule. It can’t break past an 18 PE ratio. This means there is some sort of real-world valuation mechanism determining Apple’s stock price. The same can’t be said of Twitter, Facebook, and other high-performing NASDAQ technology stocks. In fact, if you look at many technology stocks that make up the NASDAQ 500, a lot of them are appreciating not because of innovation but because of hype. Sure, there is some germ of innovation, don’t get me wrong, but it’s blown out of proportion. Case in point? Tesla. Enough said.

It’s going to be very interesting how the NASDAQ performs once it gets way past the 5,000 mark. The real test would be in the next few quarters. If it’s able to sustain a valuation of over 5,000, then we’re in good shape. However, if it starts to drop consistently, start running for the exits.

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