Nasdaq closes out its first four-quarter slump since dot-com crash

A lot has changed in technology since the dot-com boom and bust.

The Internet has gone mobile. The data center has moved to the cloud. Cars are already driving themselves. Chatbots have gotten pretty smart.

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But one thing remained. When the economy turns, investors rush for the exits. Despite Thursday’s furious rally, the tech-heavy Nasdaq finished in the red for a fourth straight quarter, marking the longest such streak since the 2000-01 boom period. The only other negative four-quarter stretch in the Nasdaq’s five history of the decade was in 1983-84 when the video game market crashed.

This year marks the first time the Nasdaq has fallen in all four quarters. It fell 9.1% in the first three months of the year, followed by a 22% drop in the second quarter and a 4.1% drop in the third quarter. It fell 1% in the fourth quarter due to an 8.7% decline in December.

For the full year, the Nasdaq is down 33%, the steepest decline since 2008 and the third-worst year on record. The decline 14 years ago came during the financial meltdown caused by the housing crisis.

“It’s really hard to be positive about technology right now,” Gene Munster, managing partner of Loup Ventures, told CNBC’s Brian Sullivan on Wednesday. “You feel like you’re missing something. You feel like you don’t get the joke.’

Aside from 2008, the only other worse year for the Nasdaq was 2000, when the dot-com bubble burst and the index sank 39%. Early dreams of the Internet taking over the world evaporated. Pets.com, famous for the sock puppet, went public in February of that year and shut down nine months later. EToys, which held an IPO in 1999 and saw its market capitalization grow to nearly $8 billion, tanked in 2000, losing nearly all of its value before going bankrupt early the following year. Delivery company Kozmo.com never launched its IPO, filing in March 2000 and withdrawing its offering in August.

Amazon had its worst year in 2000, falling 80%. Cisco it fell 29% and then another 53% the following year. Microsoft fell by more than 60% and Apple by more than 70%.

The parallels with today are quite obvious.

In 2022, the company formerly known as Facebook lost roughly two-thirds of its value as investors gave up on futures in the metaverse. Tesla fell by a similar amount as the automaker, long valued as a technology company, collapsed into reality. Amazon has halved.

The IPO market this year was non-existent, but many of the companies that went public last year at astronomical valuations lost 80% or more of their value.

Perhaps the closest analogy to 2000 was the crypto market this year. Digital currencies Bitcoin and ether fell by more than 60%. Over $2 trillion in value was wiped out as speculators fled crypto. Many companies went bankrupt, most notably crypto exchange FTX, which collapsed after reaching a $32 billion valuation earlier in the year. Founder Sam Bankman-Fried now faces criminal fraud charges.

The only major crypto company traded on Nasdaq is Coinbase, which went public last year. In 2022, its stock fell 86%, wiping out more than $45 billion in market capitalization. In total, Nasdaq companies have lost nearly $9 trillion in value this year, according to FactSet.

At its peak in 2000, Nasdaq companies were worth a total of about $6.6 trillion and continued to lose about $5 trillion of that until the market bottomed in October 2002.

Despite the similarities, things are different today.

For the most part, the 2022 crash was less about businesses disappearing overnight and more about investors and executives waking up to reality.

Companies are downsizing and revaluing after a decade of growth fueled by cheap money. After the Fed raised interest rates to try to tame inflation, investors stopped placing a premium on rapid unprofitable growth and started demanding cash generation.

“If you’re just looking at future cash flows without profitability, those are the companies that did really well in 2020, and they’re not as defensible today,” Shannon Saccoccia, chief investment officer at SVB Private, told Closing Bell: on CNBC. Overtime” on Tuesday. “The tech is dead narrative is probably in place for the next couple of quarters,” Saccoccia said, adding that some parts of the sector “will have light at the end of this tunnel.”

The tunnel she describes is the Fed’s continued rate hikes, which can only end if the economy goes into recession. Both scenarios are troubling for much of technology, which tends to thrive when the economy is in growth mode.

In mid-December, the Federal Reserve raised its benchmark interest rate to a 15-year high, lifting it to a target range of 4.25% to 4.5%. The rate was anchored near zero during the pandemic, as well as in the years following the financial crisis.

Tech investor Chamath Palihapitiya told CNBC in late October that more than a decade of zero interest rates “distorted the market” and “allowed manias and asset bubbles to build up in every single part of the economy.”

Palihapitiya benefited so much from the cheap money available, pioneering investments in special purpose acquisition companies (SPACs), blank check businesses looking for companies to go public through a reverse merger.

With no fixed-income yield available and with technology attracting stratospheric valuations, SPACs took off, raising more than $160 billion on U.S. exchanges in 2021, nearly double the previous year, according to data from SPAC Research. That number fell to $13.4 billion this year. on CNBC Index after SPACmade up of the largest companies to debut through SPACs in the past two years, has lost two-thirds of its value in 2022.

Predicting a bottom, as all investors know, is a fool’s errand. No two crises are alike, and the economy has changed dramatically since the housing bust of 2008 and even more so since the dot-com bust of 2000.

But few market forecasters expect a major recovery in 2023. Loup’s Munster said his fund held 50% cash, adding that “if we thought we were at the bottom, we would have deployed today.”

Duncan Davidson, founding partner of venture capital firm Bullpen Capital, also expects more pain. It examines the dot-com era, when it took two years and seven months to go from top to bottom. As of Friday, it’s been just over 13 months since the Nasdaq hit its all-time high.

For private investors in 2023 “I think we’re going to see a lot of bargain basements that wrap around companies,” said Davidson, who started investing in technology in the 1980s. To get to the bottom of the market, “we may need another two years,” he said.

WATCHING: The IPO market is as bad as it was in 2001