NASDAQ Dive Prompts Dot-Com Crash
The "NASDAQ Dive Prompts Dot-Com Crash" refers to a significant downturn in the technology sector, particularly impacting internet-based companies, which culminated in a dramatic collapse of the NASDAQ stock market in the early 2000s. The rapid growth of the internet in the mid-1990s led to a surge in investment, reminiscent of the California gold rush, as companies like Netscape and Amazon emerged and went public, attracting substantial investor enthusiasm. This period saw NASDAQ reaching record highs, with initial public offerings (IPOs) generating extraordinary returns despite many companies posting limited profits or losses.
However, signs of instability began to surface, with economists expressing concerns about a speculative bubble comparable to the 1929 stock market crash. The Federal Reserve's interest rate hikes further exacerbated the situation, leading to a sharp decline in stock prices, particularly after a major sell-off in April 2000. This decline continued until the NASDAQ hit a low point in 2002, resulting in the failure of numerous dot-com companies and significant job losses in sectors reliant on the tech boom. The aftermath prompted surviving businesses to adopt more sustainable practices, emphasizing sound financial planning and economic restraint. The dot-com crash serves as a critical lesson in the volatility of speculative investments and the importance of foundational business principles.
NASDAQ Dive Prompts Dot-Com Crash
Date April 9-14, 2000
When the unprecedented five-year run-up of the technology-heavy NASDAQ stock market ended abruptly in the second week of April, 2000, the market—which had been built mainly on speculation—took just five weeks to collapse.
Locale New York, New York
Key Figures
Alan Greenspan (b. 1926), economist and chairman of the Board of Governors of the Federal Reserve System, 1987-2006Mary Meeker (b. 1959), security analyst for Internet stocksJeff Bezos (b. 1964), founder and chief executive officer of Amazon.com
Summary of Event
Although the Internet was born decades earlier, it did not mature until the mid-1990’s, when the world embraced its potential and access greatly improved. Maturity came quickly, fueled by tech-savvy Generation X, a healthy U.S. economy, Fortune 500 companies desiring an Internet presence, and rampant speculation.
The two major stock markets in the United States are the New YorkStock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations system (NASDAQ). The NYSE is an auction stock market, home to the oldest and most powerful companies in the world; its main measurement is the Dow Jones Industrial Average, or Dow. NASDAQ is an electronic stock market that embraced new technology companies and saw extraordinary growth as technology companies, specifically so-called dot-coms built around the burgeoning Internet, took off.
The computer age and the increasing number of people who embraced the Internet led to a phenomenon in business. People hoping to achieve wealth have always taken certain risks investing in new companies. Once a company reached a certain level of success, it selected an underwriter to sell its shares to the public. This process, called an initial public offering (IPO), raised capital for the company and provided investors an opportunity to see their money grow.
The rush to invest in dot-com IPOs in the 1990’s has been equated to the 1849 California gold rush. Those who could hastened not to pan for gold but to invest in stocks traded on NASDAQ. Most of these twentieth century prospectors were highly educated professionals. When Netscape Communications Corporation, maker of the Netscape Navigator Web browser, held its IPO in August, 1995, the event was the equivalent of gold being discovered at Sutter’s Mill.
Although Netscape’s revenues were only $12 million—and the company was losing money—the company went public. The initial stock price, set at $31 a share, was adjusted to $28, for fear it was too high. However, the demand for stock exceeded supply. Netscape finally started trading for $71 a share. On the first day of trading, the stock rose by 108 percent, and Netscape was valued at $2.2 billion, almost as much as General Dynamics. The success of Netscape helped legitimate a type of business that seemed suspect to some. In early December, 1995, Netscape’s stock reached $170 a share, making it worth almost $6.5 billion.
Between early 1995 and the end of May, 1996, the Dow climbed 45 percent while the NASDAQ rose 65 percent. Investors and venture capitalists poured money into Internet companies. Investment companies, such as Morgan Stanley, were making huge profits, and their chief Internet analyst and promoter, Mary Meeker, became a celebrity as she ushered company after company through IPOs. Fueling investments in Internet stocks was the fact that information on each stock was readily available online, and online brokerages, such as E;Trade, helped regular people join the investment rush. By the summer of 1996, 800,000 Americans had online trading accounts.
Anyone with an idea and something to sell could start an e-commerce business. One of the biggest names to come out of the dot-com bubble was Jeffrey Preston Bezos, founder of Amazon .com. After researching products that could be sold online, Bezos decided on books, and on July 5, 1995, incorporated his new company, Cadabra, Inc. After realizing that Web sites were often listed alphabetically, he changed the name to Amazon.com, the first company to use the “.com” suffix in its name.
More companies rushed to go public, and investors, motivated by Meeker’s Internet Reports, bought. Both the Dow and the NASDAQ continued climbing. Skeptics who once thought Internet investing foolish saw their mistake and bought. In July, 1997, Broadcast.com, which had lost $6.5 million on revenues of $6.9 million, went public. Its stock opened at $18 and closed at $62.75, the largest first-day IPO gain yet. Some economists were voicing concern, comparing the market to 1929. Nobel laureate Milton Friedman saw the current market as a bubble worse than 1929’s. Alan Greenspan, chairman of the Federal Reserve, also believed there was a bubble but said that it was not the Fed’s duty to burst it.
When the Federal Reserve did not raise interest rates, Internet IPOs continued. However, due to international financial problems, the Dow fell 513 points on August 31, 1998, and the NASDAQ fell 140.43 points, with Internet stocks hit hard. Time magazine questioned, “Is the Boom Over?” To ease the situation, the Federal Reserve cut a key interest rate from 5.5 to 5.25 percent. Many were disappointed that the rate reduction was not bigger, and Internet stock prices continued to fall. To avoid the possibility of a recession, the Federal Reserve cut the rate another quarter-point.
The interest rate cuts in the fall of 1998 increased confidence so much that more investors joined the rush to riches via the Internet. EarthWeb went public, as did TheGlobe.com. The latter IPO began trading at $87 a share, almost ten times the issue price. At the end of trading, the stock had risen more than 600 percent, the biggest first-day gain in Wall Street history. On November 28, 1998, the NASDAQ closed above 2,000 points for the first time. Since the end of September, it had risen by more than 500 points, and the new IPOs kept coming. Greenspan was concerned with continually accelerating growth, and, in an attempt to control the economy, the Federal Reserve raised the interest rate to 5.75 in February and warned more increases might be ahead. The Dow reacted by losing points, but the NASDAQ continued to increase. On March 7, 2000, the NASDAQ broke through 5,000 for the first time, but the speculative bubble was now leaking. In April, the bubble had clearly burst, and people started selling their Internet stocks in earnest. On Friday, April 14, 2000, NASDAQ had fallen to 3,321.29, a loss of 35 percent. The selling on that day, which became known as Black Friday, was across the board; Internet stocks continued to drop.
Significance
Several factors contributed to the crash of the dot-coms, including the end of the so-called Y2K crisis and the technology spending associated with it, the March 13 sell-off of major NASDAQ companies, the Federal Reserve’s raising of interest rates six times between early 1999 and early 2000, and the April 3, 2000, federal court ruling labeling the Microsoft Corporation a monopoly. The hope that Christmas sales would turn things around was not realized. On December 29, 2000, the NASDAQ closed at 2,470.52. For the year 2000, it was off 39.3 percent. Internet stocks took the greatest hit: Priceline .com lost 97 percent, and Amazon.com dropped 77 percent. The bubble and free-spending ways of the late 1990’s ended. On March 11, 2001, the NASDAQ fell to 1,923.38. By October, 2002, the NASDAQ Composite bottomed out at 1141, more than 78 percent off from the high.
In the late 1990’s, Americans became enchanted with technology stocks. Someone who had invested $100,000 in 1992 in the NASDAQ would have had $850,000 by early 2000. Such potential windfalls validated the new economy, but the collapse of the NASDAQ represented a major dose of reality. Failure of so many dot-com companies had a ripple effect on businesses that grew around them and depended on them. Four out of five dot-coms in the San Francisco Bay Area went out of business in 2000 and 2001, resulting in the loss of thirty thousand direct Internet jobs. Advertising revenue fell sharply for print and electronic media, real estate business in Silicon Valley was hurt, and more people lost jobs. So many dot-coms were closing that the New York Post published a “Dead Dot-com of the Day” column. Across the country, 220 companies shut down in 2000, and by mid-July, 2001, another 330 closed. Companies that survived learned from the mistakes of those that crashed. Internet companies returned to business basics: showing economic restraint and establishing sound business plans.
Bibliography
Cassidy, John. Dot.Con: The Greatest Story Ever Sold. New York: HarperCollins, 2002. Provides historical references to the stock market and traces the dot-com debacle from the beginning of the dot-com start-ups to the crash.
Nevaer, Louis E. V. The Dot-Com Debacle and the Return to Reason. Westport, Conn.: Quorum Books, 2002. Demonstrates, with numerous examples, how the laws of traditional economics were ignored, leading to the crash of many dot-com companies.
Weber, Thomas E. “Reality Check: Life After the Dot-Com Crash—What Were We Thinking?” The Wall Street Journal, July 18, 2000, p. B1. Includes background on the dot-com bubble, how so many people risked so much to invest, why the bubble was pricked by reality, and the results.