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Nasdaq's Drop Sparks Memories of 1999-2000 Dot.com Era

A stock analyst says there are valid comparisons to that dot.com era as well as some compelling counter-arguments.

Prince once sang about partying like it's 1999, but there is no joy in tech-ville lately as some investors fear the Nasdaq's current slide has too many similarities to the final stages of the dot.com days of twenty-odd years ago.

The Nasdaq Composite Index on Wednesday saw its worst-single day session since February of last year.

"Valuations are at historical highs, companies are raising billions based on fairy dust and the Fed is signaling a tightening cycle," Jason Goepfert, chief research officer at Sundial Capital Research, said in a note. 

Tech stocks have losing ground since the start of the year as a bond market sell-off pushed the 10-year Treasury yield. 

In addition, the Federal Reserve released the minutes of their December meeting, which indicated that the U.S. central bank may need to raise interest rates sooner than expected.

Comparisons can be made on the monetary initiatives of the Fed at the time and at the onset of the Covid-19 pandemic, some experts say.

 The Fed flooded the financial system with liquidity in 1998 following the collapse of Long-Term Capital Management, a hedge fund with $126 billion in assets, which can be equated with the their support to the U.S economy and markets in March 2020.

The Fed's recent actions fueled the rise of the Nasdaq, like they did in the dotcom.era.

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Goepfert said that after Wednesday's post-FOMC selloff, more than 38% of stocks trading on the Nasdaq are now down 50% from their 52-week highs. Only 13% of days since 1999 have seen more stocks cut in half.

"All of these are scaring investors that we're on the cusp of a repeat of 1999-2000," he said, noting that there are valid comparisons to that era as well as some compelling counter-arguments.

Whatever the fundamental and macro considerations, Goepfert said, "there is no doubt that investors have been selling first and trying to figure out the rest later."

"Since the speculative mania in January/February 2021, many of the riskiest stocks have tumbled," he said. "It just so happens many of those stocks trade on the Nasdaq exchange."

The world was a different place back in 1999, when Nasdaq was surging, while the Dow and the S&P 500 were somewhat subdued, whereas today the Dow & S&P racking up record high closings.

Goepfert said there are few, if any, precedents to the kind of activity that is currently occurring the Nasdaq.

"There are some signs that it's equivalent to early 1999, right before a massive blow-off rally," Goepfert said. "And it's also somewhat similar to the behavior right after that peak."

He added that there is "a solid argument" to be made that so many stocks have been hit so hard that the Nasdaq shouldn't suffer too much more before being able to rally again.

"The most significant caveat, and it's a major one, is that there is the potential that we're also seeing behavior reminiscent of the 1999 and 2007 peaks," he said.