Nasdaq, New Land of Giants, Breaks 2,000
It’s a different index and milestone number, but the forces that propelled the Nasdaq composite past 2,000 on Thursday are the same ones powering better-known market gauges like the Standard & Poor’s 500: big gains by a handful of huge stocks that are outweighing severe weakness among many smaller issues.
Helped by a monthlong surge of technology giants such as Microsoft and Dell Computer, the main Nasdaq share index rose 6.02 points to a record 2,000.56, the first close above the second millennium mark.
Year to date, the Nasdaq composite is up a sparkling 27.4%. That even outdistances the 22% advance in the blue-chip S&P; 500 and the 18% gain in the Dow Jones industrial average, both of which also rose to record highs on Thursday.
Hitting the second millennium mark overshadows the persistent troubles of many smaller Nasdaq-traded stocks this year and runs the risk of painting an overly optimistic picture of the condition of the market, analysts say.
Nevertheless, it underscores not only the fantastic advances of tech stocks in the 1990s but the prominence that the 27-year-old Nasdaq index has assumed alongside the much older Dow and S&P.;
The Nasdaq index measures the performance of the roughly 6,000 stocks traded on the Nasdaq Stock Market, the second-largest U.S. market after the New York Stock Exchange.
Unlike the NYSE, which features an exchange floor on which traders physically interact, the Nasdaq market is an electronic system comprising thousands of brokers sitting at computer terminals across the country.
When the Nasdaq market was established in February 1971 (with the composite index at a starting level of 100), it was mostly filled with smaller companies that didn’t qualify for listing on the NYSE--let alone listing on the Dow index. And it was dominated by individual investors drawn to those, in the main, very speculative issues.
No wonder the Nasdaq market became a magnet for small tech companies, many of which were emerging as a byproduct of the U.S. space program in the 1960s.
But the speculative nature of those stocks was reflected in the Nasdaq composite soon after its creation in 1971: The horrendous bear market of 1973-74 slashed the Nasdaq index’s value by more than 60%.
The index, at 59.82 by the end of 1974, didn’t rise above 100 again until mid-1977.
Still, the period from 1976 through 1983 was a good one for Nasdaq stocks in general. Amid high inflation that dashed the earnings growth of many blue-chip companies, many smaller companies thrived. The Nasdaq index outperformed the S&P; 500 every year between 1976 and 1983.
By year-end 1983, the Nasdaq index was 278.60.
Between 1983 and 1990, however, blue chips began to dominate the market action again.
But since 1991, as many former tech start-ups matured into world-class businesses, the Nasdaq market and its main index have become prominent forces.
Nasdaq’s parent, the National Assn. of Securities Dealers, has sought to play up that growth in recent years with ads touting Nasdaq as the “stock market for the next 100 years.”
In the mid-1990s, however, Nasdaq’s image was sullied by criticism that its market was rigged to unfairly favor institutions over individual investors. Those charges led to settlements with federal regulators and a series of changes that included revamped Nasdaq trading rules.
Even as criticism stung Nasdaq, the tech business was becoming an ever-more-important sector on Wall Street. And the Nasdaq market is the home of many of the giants that lead the industry: Microsoft, Intel, Dell Computer, Applied Materials and Cisco Systems, among others.
Mirroring the multiyear rally in tech stocks, the Nasdaq, which reached 1,000 on July 17, 1995, has doubled in three years. That falls short of the S&P;'s 112% advance, but beats the Dow’s 98% gain.
The dark side of Nasdaq’s climb, especially this year, is its reliance on large tech stocks.
In the past five weeks, the Nasdaq has gained 14.7%. But the Nasdaq 100 index, which is composed of its 100 largest stocks, surged 22.4%. And Nasdaq’s five largest components--Microsoft, Dell, Intel, Cisco Systems and WorldCom--have leaped between 21% and 37%.
“It’s the Nifty Fifty all over again,” said Scott Bleier, chief investment strategist at Prime Charter, a New York investment bank. “This is the Nasdaq Big Five.”
Those five stocks have become so significant that they’re now in a number of indexes. For example, they comprise 55% of the Nasdaq 100. And having been added to the S&P; 500, they now make up more than 7% of that index.
Smaller Nasdaq issues, meanwhile, have lagged badly. The market soared early in the year on a rebound from a correction caused by worries about the Asian financial crisis. But it swooned from mid-April to mid-June, and small stocks haven’t recovered in the past month the way that larger issues have.
In fact, a whopping 57% of all Nasdaq stocks are below their 1998 highs by 20% of more, according to Richard McCabe, chief market analyst at Merrill Lynch & Co. A full 40% of Nasdaq issues are down 30% or more.
The rousing advance of the broad index is “giving a distorted image of how strong the market actually has been because money flowing into large-cap stocks has pushed them up,” McCabe said. “But below the surface, the wide array of stocks is still very depressed.”
Walter Hamilton can be reached by e-mail at email@example.com
New Millennium for Nasdaq
The Nasdaq composite index, which includes all 6,000 Nasdaq-traded stocks, closed above 2,000 for the first time Thursday, rising 6.02 points to 2,000.56. That is a twentyfold increase since 1971, versus an elevenfold increase in the Dow Jones industrials. But the index has produced most of its gain since 1991, with the explosion of the technology sector. Percentage change in Nasdaq index each year:
1973-74: Worst U.S. bear market since the Depression
1976-83: Nasdaq index beats S&P; 500 every year.
1991-98: Tech stocks surge.
1998 year to date: 27.4%
What’s Driving the Market
Telecom and technology stocks are far outperforming other Nasdaq issues this year. Nasdaq sector returns and those of the blue-chip Dow industrials and Standard & Poor’s 500:
Telecom index: +47.0%
100 biggest Nasdaq stocks: +46/6%
Industrial index: +11.9%
Transportation index: +9.0
Bank index: +3.5%
Insurance index: +0.7%
S&P; 500: +22.0%
Dow Jones industrials: +18.0%
Who Owns Nasdaq Stocks
Ownership of Nasdaq National Market System issues, percentage of shares held*:
Corporate insiders: 27.5%
Sources: Bloomberg News, Nasdaq, CDA Technologies
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Nasdaq’s Tech Behemoths
Nasdaq has become synonymous with technology stocks. Among the market’s largest tech-related issues:
Thurs. Pct. 1998 Stock close Change change change Apple Computer $37.50 +$3.06 +8.9% +186% Dell Computer 113.75 +1.88 +1.7 +171 Microsoft 117.38 unch. unch. +82 WorldCom 54.91 +0.16 +0.3 +81 Cisco Systems 95.75 +0.19 +0.2 +72 Amgen 70.50 --0.38 --0.5 +30 Sun Microsystems 49.94 +0.56 +1.1 +25 Oracle 27.69 +0.63 +2.3 +24 Intel 84.25 unch. unch. +20 Applied Materials 31.19 +0.56 +1.8 +4 Nasdaq composite 2,000.56 +6.02 +0.3 +27
Source: Bloomberg News