13 Reasons for the NASDAQ Crash

by | May 22, 2000

After the NASDAQ Composite Index slid 33% from March 27th to its dramatic one-day decline on April 14th, most people weren’t sure what had happened – or why it happened. The financial press was in an uproar trying to make sense of everything, and even now, dozens of gurus are vying to establish themselves as […]

After the NASDAQ Composite Index slid 33% from March 27th to its dramatic one-day decline on April 14th, most people weren’t sure what had happened – or why it happened. The financial press was in an uproar trying to make sense of everything, and even now, dozens of gurus are vying to establish themselves as the next guru who were successful in “calling the crash.” From these people, I’ve heard a lot of explanations (not all of them sensible), but now that one leg of the “crash” is over, I thought it would be interesting to examine them:

1) Some technical analysts have suggested that the Nasdaq Composite index diverged too far above its 200-day moving average, and so it had to fall back. Why not the 183-day moving average, I ask? It’s just another way of saying that the market rose quickly. While I admit that unusually steep climbs have in the past been associated with volatile declines, few end up generating a 30% plunge in two-weeks.

2) A few economists/gurus from the Austrian School have suggested (after the fact) that a government credit expansion has been pumping liquidity into stock markets for years, and has finally run out of steam. They said the same thing five years ago, and never seem to explain the specific timing of their scenario, or outline a coherent model for the economy describing the phenomenon.

3) Hedge Funds – Hedge fund buying or selling has always been a convenient excuse for nearly anything that can’t be explained. But the fact is, hedge funds simply don’t dominate equity pricing – they’re really just another investor in the market.

4) Many have suggested that Federal Reserve rate hikes were finally starting to hurt the market. This might get partial credit – but why did the market rise through the first four rate hikes and then wait for the last one to fall?

5) New issues of stock, and expiring lockups (restrictions on stock sales) of last year’s Internet IPO’s were said to have flooded the market with a supply of paper, pushing down prices. Yet during previous times, investors’ demand for technology investments was seemingly insatiable. What changed?

6) Margin Calls – many have focused on tech stock investors’ dangerous use of margin, and blamed the tech stock rout on margin calls. While it can be argued that such calls may have exacerbated the decline’s volatility, the fact is that margin calls are a result of market declines, not a cause.

7) The press convinced investors that valuations were too high: A Barron’s article last month (which predicted how long Internet companies would have until negative cash flow bankrupts them) was said to have pushed investors out of internet stocks. Additionally, a well-respected Finance author wrote an article in the Wall Street Journal showing that investments in expensive growth companies like Cisco and E-bay were likely to under perform over the long run, leading investors to re-think their investments. I can’t believe this explanation, because investors have been deaf to these arguments for years.

The list goes on. In the next few weeks, I’ll take a look at the balance of the thirteen, and see if, in the end, there’s any reasonable explanation for the fabled fall of the Nasdaq

Andrew West is a Contributing Economics Editor for Capitalism Magazine. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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