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The dot-com bubble: how the Nasdaq fell 78%
The internet really did change the world. But in March 2000, the stocks betting on it hit a peak that took 15 years to see again. On the way down, the Nasdaq lost 78%.
The world before the bubble
In the mid-1990s, most people had never sent an email. Within five years, the web was everywhere.
On 9 August 1995, Netscape, the company behind an early web browser, sold shares to the public for the first time. The price more than doubled on day one. Many people date the boom from that moment.
The excitement was real. So was the technology. Email, online shopping and search did go on to change daily life.
The question was never "is the internet important?" It was "what are these companies worth?"
What happened
Through the late 1990s, money poured into anything with ".com" in its name.
Companies with little or no revenue went public at huge prices. Many measured success by "eyeballs" (visitors) instead of sales or profit. Old-style measures like the P/E ratio, which compares a share price to the company's profits, stopped making sense, because many companies had no profits.
In December 1996, Fed Chairman Alan Greenspan asked in a speech how we would know when "irrational exuberance" had pushed up asset prices too far. Markets kept rising for more than three years after that.
The Nasdaq Composite, an index full of tech companies, roughly doubled in 1999 alone.
The moment everyone remembers
On 10 March 2000, the Nasdaq closed at 5,048.62. It was a record.
Then it turned.
The Fed had been raising interest rates to cool the economy. Some big tech companies warned their sales would slow. Investors began asking about profits again.
The fall wasn't one crash day. It was a long slide, with sharp rallies on the way down that made many people think the worst was over.
- Pets.com went public in February 2000 and shut down that November.
- Online grocer Webvan, once valued in the billions, filed for bankruptcy in 2001.
- Even strong survivors fell hard. Amazon's shares lost more than 90% from their 1999 peak.
On 9 October 2002, the Nasdaq closed at 1,114.11. That was about 78% below its peak. The broader S&P 500 fell roughly half over the same stretch.
The Nasdaq didn't close above its March 2000 record until 23 April 2015.
What it teaches
1. A great story isn't the same as a good price
The internet was the right idea. Many of the stocks were still the wrong price. Being right about the future didn't protect buyers who paid any price to get in.
2. Fear of missing out is loudest at the top
By 1999, friends, neighbours and TV hosts were all talking about tech stocks. That pull, "everyone else is in, so I need to get in," has a name: FOMO. Read FOMO trading for a simple pause you can use when a move feels urgent.
When a market is all anyone talks about, slow down. Use the same rules, the same size and the same stop you'd use on a quiet day.
3. Bounces in a falling market fool people
The Nasdaq had several big rallies between 2000 and 2002. Each looked like "the bottom". Each failed.
A falling market is one that keeps making lower highs and lower lows. Until that changes, a bounce is just a bounce. See how to identify a trend and higher highs and higher lows.
4. A 78% loss needs a 350% gain
That's the harsh math of big losses. From 1,114 back to 5,048 is a rise of about 353%. Try other numbers in the loss recovery calculator. It's the reason we keep each trade's loss small: big holes take a very long time to climb out of.
What it doesn't mean
- It doesn't mean tech stocks are a bad idea. Some companies from that time became among the largest in the world. Many others vanished. Nobody knew in advance which was which.
- It doesn't mean every fast rise is a bubble. People call bubbles all the time. Most calls are wrong, and some are early by years, as Greenspan's 1996 speech shows.
- The 15-year number is about one index's price. People who bought steadily over time had very different results from people who bought everything at the peak.
- It's not a timing signal. Spotting a bubble is easy afterwards. During one, the chart still tells you more than the headlines.
Timeline
| Date | Event |
|---|---|
| 9 Aug 1995 | Netscape goes public; the shares more than double on day one |
| 5 Dec 1996 | Greenspan's "irrational exuberance" speech |
| 1999 | The Nasdaq roughly doubles in a year |
| 10 Mar 2000 | Nasdaq closes at a record 5,048.62 |
| Nov 2000 | Pets.com shuts down |
| 2001 | Webvan files for bankruptcy |
| 9 Oct 2002 | Nasdaq closes at 1,114.11, about 78% below the peak |
| 23 Apr 2015 | Nasdaq closes above its 2000 record for the first time |
Questions
What caused the dot-com bubble?
Huge excitement about the internet led investors to pay very high prices for young tech companies, many with no profits. Easy money for new companies and fear of missing out pushed prices higher until the story met reality.
How much did the Nasdaq fall after the dot-com bubble?
About 78%, from 5,048.62 on 10 March 2000 to 1,114.11 on 9 October 2002.
When did the dot-com bubble burst?
The Nasdaq peaked on 10 March 2000. The fall lasted until October 2002.
How long did it take the Nasdaq to recover from 2000?
About 15 years. It first closed above its March 2000 record on 23 April 2015.
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