Credit: Shutterstock photoAt the end of November 2013, the NASDAQ Composite Index reached the milestone level of 4000 for only the second time. The first time the index crossed this level was during the final days of 1999. At that time, the tech or dotcom “Bubble” was well underway and by early March 2000, the Composite would go on to reach its all-time peak of 5049, after which it began a precipitous fall as the bubble burst.
Well before the tech bubble, but certainly during it, the NASDAQ Composite gained a remarkable level of publicity. The term “tech-heavy” is often used by reporters when mentioning “the NASDAQ.” Then, as now, the daily performance of the Composite is closely followed by the financial press and viewed as an indicator of the health of tech and growth companies, as well as macro forces impacting the broader economy and capital markers.
Before reviewing the changes that have occurred over the last 14 years, it is useful to understand the details behind the construction of the NASDAQ Composite. The index simply represents the value of all stocks listed on the NASDAQ Stock Market. Included are all common stocks and common equivalents, such as ADRs and Ordinary Shares (both of which refer to shares of non-U.S. issuers). Derivatives, such as warrants and funds such as ETFs, are excluded. This purely transparent and automated approach stands in stark contrast with the Dow Jones Industrial Average and the S&P 500, the components of which are chosen by committee.
The Composite has been around since the launch of NASDAQ on Feb. 5, 1971, when its value was set at 100. The index is market capitalization weighted, meaning that a given stock’s weight in the index is proportional to its market cap. A stock’s weight is not “float-adjusted,” i.e., reduced to account for shares not available to trade by the investment community. (Specific index rules are in a methodology document available at http://www.indexes.NASDAQomx.com/docs/methodology_COMP.pdf.)
From day-to-day, changes in the level of the NASDAQ Composite (or no change at all) are reflective of the changes in value of the component stocks. Observers can easily interpret the NASDAQ at 4000, then 4001, then 4010, and so on. This is because the components, over such short time periods, don’t change very much except for their prices.
However, over longer time periods such as the last 14 years, the component stocks do change in very significant ways. This means that observers cannot easily interpret the significance of NASDAQ 4000 then versus NASDAQ 4000 now.
In fact, there are so many changes that have occurred in this 14-year period that analyses from several perspectives are warranted and worthwhile. Click here to take a deeper dive into the history of the NASDAQ Composite Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
