What's in a Number?

0 is the additive identity; 1 is the multiplicative identity; 2 is the only even prime number; 3 is the number of spacial dimensions we live in; ....; 5,000 is the largest number whose English name does not repeat any letters; ...; 5,048 is the number of strongly connected digraphs with 5 vertices (and I thought it was the number associated with the all time NASDAQ high)

With the NASDAQ bumping up against its all time highs I thought it pertinent to take a look at the index and explain why the excitement regarding this number is really just a sales pitch rather than a meaningful indicator of the business and investment environment.

In March 2000 the NASDAQ hit its all time high of 5,048.62.  Fifteen years later (almost to the day) the NASDAQ managed to reach 5,000 but has not managed to close above the all time high - YET.  I say yet because it appears that the market manipulators are hell bent on getting all the indices to produce all time highs; it makes for better cheer leading opportunities!

So digging into the NASDAQ a number of things pop right out.  First off the index now only consists of 43% tech stocks whereas back in 2000 it was almost 65% technology.  Second the index constantly changes the companies that it incorporates into the index.  Had the same companies remained in the index that were there in 2000 the index would still be miles from its high.  Back then companies like PMC Sierra, JDS Uniphase, Sycamore and Juniper Networks were pushing the index at a huge clip.  Today Sycamore is gone completely and the other three are limping along at fractions of their all time highs.  Only tree of the top 10 companies from 2000 are still in the top 10 now (Microsoft, Intel, Cisco) and all three of them are still a long way from the heady highs of 2000.  So the index now relies on a new breed of companies to generate returns.  Apple has sprung from almost non-existent to the largest company in the world; Google, Facebook and Amazon have all come through the ranks and now fill up the top five spots with Microsoft.

A third difference is that (according to the pundits) the Price to Earnings ratio (P/E) is far lower today than it was then so there is no bubble.  now while I am not contending that a bubble exists the P/Es are still elevated.  Apple is at 18, Google at 26, Facebook at 72 and Amazon does not have one as it is not profitable (sound familiar).  When you raise up the hood to take a deeper look and find companies like Twitter, Tesla and others it starts to look almost identical!  So while it might appear that things are different this time in terms of valuation they are scarily similar.

Fourth, in terms of a recovery, making it back to 5,000 is hardly a resounding success.  Factoring in a mild form of inflation would mean that the index should be at around 7,000 for an investor to break even and we are a long way from there.  To think that it has taken more than $4 Trillion in Federal Reserve stimulus and all we have to show is the media frenzy over a meaningless number is sad to say the least and with the reduction in Fed stimulus it appears that 5,048.62 may be the hardest hurdle to cross but I have to believe that having forced the bar this high they will not stop until the trumpets are sounding from Wall Street.

So when it comes down to it this number is meaningless unless you are a marketing person on Wall Street.  It is not going to change the economic landscape and it is not signalling a new investment era but rather, scarily, it might be signalling a return to the bad old days.