What We Can Learn From the Best-performing

by Michael Lombardi, CFP, MBA

What’s the best-performing stock index this year?

Believe it or not, it is the NASDAQ. Remember that high-tech-stock-laden index that traded as high as 5,000 in early 2000 and then came crashing down to almost 1,000 in 2002? Well, the NASDAQ is on a tear this year. And there’s a lot we can learn from the action of this
index.

So far for 2009, the NASDAQ is up 17.5%. Not bad, considering the S&P 500 is up only four percent for the year and the Dow Jones Industrial Average remains flat.

I still remember 1999 and my friends buying high-tech stocks on the NASDAQ that had no sales, no real business plan…just an idea. My friends didn’t want to get left behind and miss the profit party, so they jumped into NASDAQ stocks. Yes, some high-tech giants of today were born on the NASDAQ. But for every star on the NASDAQ, there were 25 to 50 dogs. And most investors who jumped in the NASDAQ in 1999 and 2000 never recovered their investments.

So, here we are nine years later, and the NASDAQ, while being up for 2009, is still down an astounding 63% from its high in the year 2000. What is the lesson here?

Bear market do not end quickly. On Bloomberg this morning, I see two well-known market analysts saying the bear market is over. Every passing day, I see more analysts coming out and saying, “The recession is over, stocks are going higher, the market lows are in.” I don’t think these people understand bull and bear markets.

The greatest bull market of this century started in 1982 and ended in 2007, when the Dow Jones Industrial Average peaked at 14,164. A 25-year bull market, and all the excesses it creates, does not end in two years.

All we have to do is to look at the NASDAQ to see how long a bear market can last. In the case of the NASDAQ, it’s been nine long years since the index saw its all-time high. I wouldn’t be the least bit surprised if the Dow Jones Industrial Average did not see its all-time high for another 10 to 15 years.

Michael’s Personal Notes:

A report circulating on the Internet this morning says the Federal Reserve has lost $16.5 billion so far on its bailouts of Bear Stearns and AIG. This is why I don’t like the idea of using taxpayers’ money to bail out private companies. Sure, the government hopes the value of its investments in Bear Stearns and AIG will rise once the economy turns around, but I am doubtful. The bottom line is that, today, right now, $16.5 billion of taxpayers’ money has vanished bailing out companies that made wrong decisions. Bear Stearns and AIG are only two examples. I’m sure we will learn more about good taxpayers’ money turned bad in the months ahead.

Where the Market Stands:

The Dow Jones Industrial Average is down less than a half percent for the year, while all the other major market indices have turned positive for 2009. The falling U.S. dollar, rising long-term interest rates, and falling bond prices are placing pressure on the bear market rally. I continue to believe that the rally still has room on the upside.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict that a major homebuilder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.