Keywords: summary of the 2000 recession, summary of the dotcom bubble, summary of the dotcom crash, summary of the 2000 crash, what caused the 2000 crash summary, what caused the dotcom crash summary, dotcom bubble 2000, nasdaq 2000 crash, summary of nasdaq crash 2000, summary of nasdaq dotcom crash.
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In the early '90s, only about 2% of the US population used the internet due to operational complexities involved with usage. Then came 'Mosaic,' essentially, a web browser that eliminated some degree of complexity associated with using the internet and accessing information online. Web traffic exponentially increased with the invention of Mosaic, with a 1000% increase within the month of its release.
Concomitantly, during this period, the FED in the US dropped the discount rate (to tackle the downturn of the yearly '90s) from 7% in November to 3% in August 1992. A 60% decline approximately. Capital became cheaper, and with an assumed revolutionary tech, entrepreneurs started launching all sorts of 'dotcoms,' with primary business viability and logic lacking, more and more, behind these launches. Arguably, the illogical behavior of agents started to shift more towards the frenzied irrational state from 1995 onwards.
In 1995, with the launch of the Netscape Navigator browser, which was known for a faster and easier interface. While Netscape was not making any profits, its IPO was launched, and on the first trading day, the stock increased about 100% . . . in 1 day.
There was an exponential increase in internet users and websites from 1994 onwards. It seemed that a new era had ushered in . . . with a 'to the moon' mentality prevalent in the market. Financial stress-related indices started moving up from 1997 onwards, yet the market didn't show much concern.
While there was some growth in profits of online companies, the investment in these ventures was disproportional, i.e., their profits, if any, were not growing at a pace comparable to the inflow of investments in these ventures. Financial delusionalism was also prevalent during this time.
Investors, governed primarily by greed, were further misguided by 'professionals' who saw short-term losses of internet companies likely to be over-turned—the classic discounting of a future positive NPV. Suffice to say that the capital inflows in the dotcoms weren't managed efficiently or rationally by the 'management' of the dotcom businesses.
By 1999, Nasdaq increased approximately 290%, from its 1994 value, a yearly increase of about 27%. During this time, sales growth was becoming, more and more, the parameter of choice for investors, the assumption being that with increased sales, over time, profits would also start to materialize. This led to many companies selling below cost, overspending on marketing, and moving towards M&As for increasing their sales; the fundamentals of organic growth were abandoned to increase sales volumes.
In this environment came the fear of the Y2K bug. This scare led to wide scale computer updates, which further increased the sales of tech companies. Stocks started seeing their returns increase by many folds for some. This further added fuel to the fire, arguably, pushing markets into a state of crazed mania.
This condition, similar to the 1930s, led many people with no financial training to move into trading stocks. On March 10, 2000, the Nasdaq reached 5000+ points; this, in terms of reflection of fundamentals, meant a price 200 times earnings. However, the FED by June 2000 had increased the discount rate to 6%, arguably, due to concerns of overheating.
Global economic conditions around the end of the '90s were taking a turn too. With the FED moving more towards, let's say, conservative policy (contractionary policy), selling pressure on stocks during this time, the late '90s to early 2000, was gradually building up. In March of 2000, when it was announced that Japan had entered a recession, Nasdaq suffered its 4th largest loss (compared to periods before 2020). This caused investors to turn skeptical and fearful – questioning their investments' long-term survivability and capital requirements.
With investment inflows drying up, the new dotcom and technology companies started burning through cash. As investors' profit expectations did not materialize, the selling pressures of stocks increased from moderate to severe. In a very short amount of time, companies worth exorbitant amounts of money became worthless. Managements' mismanagement and imprudent agency were uncovered. In some instances, fraud was also uncovered. All these reasons, in amalgamation, worked as a contractionary tsunami, to undo the economic and market gains of the mid to late '90s.
The US entered a recession in March 2000, and the bottom of the market (Nasdaq) was reached in October 2002, at about 1100 points, approximately 80% fall, 'peak to troughs.'
The economic implications were severe; almost half a million tech workers lost their jobs during this period. Of course, whenever there is such a severe impact on employment levels in an economy, there are ripple effects; consumption, investment, savings, all major economic parameters are impacted with such a move in the job market, and so they were.
Thousands of names that were thought to be the future and had money thrown on them, from left, right, and center, went extinct. The recovery was slow, with the annual US real GDP, till 2020, never hitting the 1999 growth rate of 4.75%. Many promising names vanished in a short amount of time.
The most important lesson, however, is that those that lost fortunes, thought that the investments they were pouring their life savings in, were the future. If you could go back in time and present arguments that we know now are correct, you would be considered a naysayer, a pessimist. This is because they thought, as always, that "this time it's different."
Oh, how we always forget. . .
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