1 - The tech bubble

Abstract

During the late 1990s, the investment attention and economic resources of growth stock investors became riveted on the Nasdaq 100. Not since the early 1970s, and the days of the Nifty 50, had US investor interest been so narrowly focused on a relative handful of growth stock favorites. Never before had a group of US stocks been accorded the price–earnings (P/E) multiple and extreme market capitalizations accorded to the Nasdaq 100 during the period leading up to the 2000 market peak. In a US investment environment where conventional P/E ratios for the most successful corporations tend to fall in a broad range from 10–20, P/E ratios of roughly 100 for the Nasdaq 100 can only be described as extraordinary. Many financial economists and market observers argue that stock market prices sometimes reflect a bubble component. These critics of efficient markets theory point out that conventional theory cannot account for unusual periods of volatility in security prices. Similarly, conventional economic analysis of stockmarket fundamentals sometimes fails to explain extreme valuations for individual equities and market sectors. This is the situation with respect to the Nasdaq 100 during the period leading up to the 2000 market peak.