Recent times have been dreadful for investors especially for holders of growth and tech stocks (See "The Crash of the High Fliers") . Many are waiting for signs of an upturn. Do a few big up days mean the carnage is over?
Hello and welcome to another session of Reflections on Investing with the Cornell Capital Group. And for most investors, these are nervous, nervous times, particularly for tech investors. Last Friday, May 6th, the Nasdaq closed at 12,144. That's down more than 24 percent from its November highs - bear market territory.
So, we thought today we could help give you a little perspective by examining how the market behaved during the three biggest Nasdaq drawdowns in recent history. Okay.
So, here we are. We're going to use Federal Reserve data. And what you're looking at right now is the Federal Reserve's plot of the Nasdaq Composite Index from the starting point at which they maintain the data, which is February of 1971, up through the recent experience ending with May 4th of 2022. And during that time period, there were three major drawdowns. A little hard to see on this big graph; we'll take a look at specific ones in a minute. But the first is the famous dot-com bubble that was from around 2000 to 2002. You can see that there. The second one was the financial crisis from 2007 to 2009 or so. And the third one, which is short and deep (a little hard to see on this big graph), was the COVID crisis, and that was from, uh, March to about April of 2020. There we go. We can see where it was. Okay. Let's, uh, let's take a little finer look at these things before we delve into some data.
So, let's look first at the dot-com bubble. The market started... its peak was over 5,000 in March of 2000, and it just drops and drops and drops, and finally bottoms out around 1,100 in October of 2002. That's the longest and the biggest drawdown for the Nasdaq in modern history.
Second one was the financial crisis. The peak point was at about, uh, 2,900 in October of 2007, and the Nasdaq drops all the way to 1,268 in March of 2009.
Final one is more familiar to us: it's COVID. In that one, the peak was 9,817 in February of 2020, and it dropped sharply to 6,860 on March 23rd [2020].
So, we're going to take a look at what happened during those drawdowns. And in particular, we're going to be interested in: were there good days during the drawdowns? And if so, how many? But we need context for that. So, we've developed here at Cornell Capital Group a little spreadsheet that gives context to those three drawdowns. So, let's take a look at that. Here we are.
There's a lot of information on this spreadsheet, so let me walk you through it. The first thing we did is we broke out the three big drawdowns: the dot-com crash, the financial crisis, and the COVID [crisis].
And for the dot-com crash: the peak was March 10, 2000; the trough was October 9, 2002. It started at 5,048 and dropped to 1,114 - a decline of a disastrous 78%. Ouch!
During the financial crisis (and these are all for the Nasdaq): Uh, on October 31st, 2007, the Nasdaq peaked at 2,859 and fell to 1,268 on March 9th of '09 - a drop of 56 percent. And incidentally, the dot-com drop lasted 648 trading days; the financial crisis drop lasted 340 trading days. And the final one is COVID: the market peaked at 9,817 (the Nasdaq) and fell to 6,860 - a decline of 30 percent in a remarkable 24 days.
So, those are the three biggest drawdowns in the history of the Nasdaq, as reported by the Federal Reserve, for the 51-year period beginning in 1971.
So, if we come down here, here are some statistics on the full data set. There's the full period covered by the Federal Reserve: February '71 through May of '22. There's a total of 12,925 trading days in the entire sample period. If we add up the peak-to-trough trading days during the drawdowns, that comes to 1,012 trading days out of the 12,925, or 7.83% of the time we were in these three major drawdowns.
Well, the question we thought would be interesting to ask is: how much of the large decreases and increases in the Nasdaq index occurred during each of these three crisis periods? So, what we did is we took all these 12,925 trading days and sorted them into the biggest increases and the biggest drops. Now, I'll start with the drops. You would expect that most of the big drops were in these down periods; this is when the market was really falling. So, we would expect to see a lot of big drops. It's, for example, if you have a baseball team and you tell someone that they've lost 20 games in a row, you'll imagine that their pitching statistics have to be pretty poor. And that's exactly what works out. The, uh, down periods account for only 7.8% of the total trading days, but they account for 72.5% of the top 40 drops. So, the really large drops, not unexpectedly, occurred during these three drawdowns.
But here's the really interesting thing. Now, over here, we have sorted the biggest increases in stock price, uh, during this entire 51-year period, and these are the top 40. You can't see all 40 on the video here, but we go down to about 36. And we've color-coded them for you. If the increase occurred during the dot-com [crash], we put it in blue; if it was the financial crisis, we put it in sort of off-red; and if it was COVID, we put it in gold. And here's the interesting thing: 80% of the 40 biggest increases in the Nasdaq index occurred during the three greatest drawdowns.
And I think this is a real warning for investors: that these drawdowns were not only periods of down market, they were periods of very volatile market and therefore tended to include all the biggest increases. So, if you see a big increase or two now, can you conclude that it's an indication that the bad times are over? Unfortunately, absolutely not. In two cases, when we reached the trough, there was a big increase. Incidentally, when we reach the trough, the next day has to be an increase by definition (because that's the way a trough is defined), and two of them did have big increases after that. But almost all these big increases occurred during the height of the overall bear market.
Another thing that's interesting to note: the first day [in the top 40 increases list] that's not related to any of these [drawdown] events... This day here, for example, is the first day at the end of the COVID crisis. This is at the end of the financial crisis. And this day here, which is one of the top 40, is the first day after Black Monday in 1987.
So, the shocking fact is that during the three worst times for the Nasdaq market, there were virtually all of the largest increases in stock prices.
What can you take away from that? Well, two things. One: Big increases in stock prices don't necessarily signal good times ahead. There's very little, if any, information in short-term market movements. Two (and this relates to predictability): To the extent that the market is predictable (and in large part, the market is unpredictable), the key is long-term valuation. When valuations are very high, future returns tend to be low, and vice versa.
So, at the Cornell Capital Group, we focus on valuation and not short-term movements. So, we're looking forward to interesting days ahead. There may be large increases, but don't make too much of that. As we've shown today, even in the worst of times, we often see the biggest increases in stock prices.
This has been Reflections on Investing with the Cornell Capital Group.