How the index went more than 70% up
Dotcom Bubble
The dotcom bubble, also known as the internet bubble, was a rapid rise in U.S. technology stock equity valuations fueled by investments in internet-based companies during the bull market in the late 1990s
Investors poured money into internet startups during the 1990s in the hope that those companies would one day become profitable.
With capital markets throwing money at the sector, start-ups were in a race to get big fast.
Some start-ups spent as much as 90% of their budget on advertising.
Record amounts of capital flowed started flowing into the Nasdaq in 1997. By 1999, 39% of all venture capital investments were going to internet companies. That year, 295 of the 457 IPOs were related to internet companies, followed by 91 in the first quarter of 2000 alone.
Fed Chairman Alan Greenspan had warned the markets about their irrational exuberance on December 5, 1996. But he did not tighten monetary policy until the spring of 2000, after banks and brokerages had used the excess liquidity the Fed created in advance of the Y2K bug, to fund internet stocks. Having poured gasoline on the fire, Greenspan had no choice but to burst the bubble.
The bubble ultimately burst in a spectacular fashion, leaving many investors facing steep losses and several internet companies going bust.
But companies that famously survived the bubble include Amazon, eBay, and Priceline.
The failure
The value of equity markets grew exponentially during the dotcom bubble, with the Nasdaq rising from under 1,000 to more than 5,000 between 1995 and 2000.
Equities entered a bear market after the bubble burst in 2001.
The Nasdaq, which rose five-fold between 1995 and 2000, saw an almost 77% drop, resulting in a loss of billions of dollars
The bubble also caused several internet companies to go bust
How the Dotcom Bubble Burst
The 1990s was a period of rapid technological advancement in many areas, but it was the commercialization of the internet that led to the greatest expansion of capital growth the country had ever seen. Although high-tech standard bearers, such as Intel, Cisco and Oracle were driving the organic growth in the technology sector, it was the upstart dotcom companies that fueled the stock market surge that began in 1995.
The bubble that formed over the next five years was fed by
- Cheap money
- Easy capital
- Market overconfidence
- And pure speculation
The Nasdaq index peaked on March 10, 2000, at 5048, nearly double over the prior year. Right at the market’s peak, several of the leading high-tech companies, such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value. As investment capital began to dry up, so did the lifeblood of cash-strapped dotcom companies. Dotcom companies that had reached market capitalization in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital evaporated.
Source : Investopedia
Source : Investopedia