A security officer stands guard outside the Nasdaq MarketSite in New York's Times Square, in this August 23, 2013, file photo.Reuters
When you see the Nasdaq composite index closing above 4,000 for the first time since 2000, as it did on Tuesday, you can be forgiven for seeing trouble ahead. The index, more than any other, reflected the insanity of the technology bubble of the late 1990s – and while 4,000 is still 20 per cent below its peak (also in 2000), it's back in the foothills.
For sure, nervous investors will add Nasdaq's current level to their list of reasons why stocks in general are looking overheated and ready for a sharp correction.
But what's more interesting is that today's Nasdaq is not the same index it was in the 1990s. The Wall Street Journal, using data from Birinyi Associates, broke down the index into sectors, and then compared the weightings in 1999 to today.
While the Nasdaq is still heavily weighted by tech stocks, they do not dominate to the extent they used to, making the index appear far more diversified.
Now, tech stocks account for 44.8 per cent of the index, versus 65.9 per cent in 1999. Consumer stocks have grown to 16.7 per cent, up from just 5 per cent in 1999. Health-care stocks have grown to 13.9 per cent, from 6.2 per cent. And telecom stocks have shrunk to 7.1 per cent from 15.2 per cent.
The Nasdaq's valuation – while steep – is also far different today than it was during the tech bubble. In 1999, the index had an average price-to-earnings ratio of 73. Today, it is 24.5.
Still, if you want to worry about something, the Nasdaq has plenty to offer. Its P/E ratio is 44 per cent higher than the benchmark S&P 500.
It is also still the go-to-index for frothy stocks. Its two best performers this year, Netflix Inc. and Tesla Motors Inc., have estimated P/E ratios of 196 and 226, respectively.
The verdict: No, this isn't a repeat of 1999. But yes, the Nasdaq offers one more reason to be cautious on stocks.
David Berman