In 2001, after the dot-com bubble burst, Nasdaq's composite index was displayed in New York's Times Square.
In 2001, after the dot-com bubble burst, Nasdaq's composite index was displayed in New York's Times Square. Cameron Bloch/AP
Ten years ago, the Nasdaq composite index hit its all-time high of 5,048, and the so-called bubble burst.
The stock exchange, home to a lot of the Internet and telecom stocks that shot into the stratosphere during the dot-com boom, is still recovering. On Wednesday, it closed at 2,358 — only half of the high.
During the boom, stocks like WorldCom, AOL and Yahoo traded at astronomical levels. And even though a lot of people warned that the tech surge wouldn't last, stocks kept climbing, says Jeremy Siegel of The Wharton School at the University of Pennsylvania.
"Bubbles always go further than anyone expects, and this one certainly did," he says.
When the tech bubble burst, it left scars on the economy that are still being felt today.
The Rise Of The Tech Stock
The tech stock boom really took off in the 1990s as a reaction to the digital revolution, which was already radically changing the way so many industries operated. Companies that hadn't existed a few years before had suddenly become powerful forces in the economy.
By 2000, any company with dot-com in its name could make investors swoon, even if it had no profits and no real hope of earning any. There was a new paradigm in the economy — or so it seemed.
"I had students who were rushing off to start companies, and I thought, 'Gee, well, what am I doing here?' " says David Kirsch, who teaches at the University of Maryland's Smith School of Business. "I would try to teach strategy in the classroom, and the students would look at me like that was yesterday's news. And I started to believe it."
The End Of The Ride
But bubbles burst, and this one did, too. On March 10, 2000, tech stocks began a fall they've never really recovered from. Why it happened then is something economists are still studying. Kirsch says Internet sales had been disappointing during the holidays.
"It's as those data start to come out in early 2000 that investors start to realize not everyone can be Amazon," he says. "Not everyone can succeed and get big fast."
Then, too, the Y2K scare was over, which meant tech spending by companies was down. Jonathan Coleman of Janus Capital says investors started getting nervous.
"The market — over long periods of time — can vacillate between fear and greed," Coleman says. "We were coming off an extended era of greed. Once the market started to crack, I think a lot of investors started to look up, and fear started to take over."
In the carnage that followed, a lot of new tech companies went under, but not all of them. Kirsch has studied about 1,000 of the Internet companies born during the late '90s. Nearly half still exist today. Kirsch says many of these are smaller companies that found a retail niche and took advantage of it. Today, he says these companies make decent profits, but they probably won't ever make a killing in the market.
"So, in some sense, the firms that succeeded were the firms that didn't fall victim to get big fast, that followed basic business practices," he says.
On The Upswing?
The technology sector as a whole is now healthy. Companies like Oracle and Cisco are stalwarts of the stock market, but Siegel says they're still well short of the heights they hit a decade ago.
"If you survived the recession of 2002, you're probably going to be around, but you probably will not enjoy the price you had experienced a decade ago — maybe never again," he said.
Siegel notes that the Nasdaq is still 50 percent below where it was a decade ago. But he says it took almost 30 years for the Dow Jones Industrial Average to recover all the ground it lost in the crash of 1929.
And it could take just as long for the tech sector to recover this time around.