In the late 1990s, the internet promised to change everything, and it did. But investors' excitement ran far ahead of reality. Companies with no profits, sometimes barely any revenue, were valued in the billions. Then the bubble burst. In Part 14 of Great Financial Crises, we look at the dot-com boom and bust.
A revolution in the making
The World Wide Web became widely available in the mid-1990s. Web browsers made it easy to use, and millions of people went online. Businesses rushed to create websites and new online services. Investors believed the internet would create enormous new markets, and many saw anything with ".com" in its name as a future winner.
The ingredients of the bubble
- A genuine technological revolution that made huge future profits seem possible.
- New valuation ideas: investors focused on website "eyeballs," user growth and market share rather than profits.
- Easy money: according to Goldman Sachs's history of the period, the Federal Reserve cut interest rates after the 1998 LTCM crisis (Part 13), adding liquidity to markets.
- An IPO frenzy: from late 1998, a seemingly endless stream of internet companies went public, and many shares doubled or more on their first day of trading.
- Retail enthusiasm: online brokerages made it easy for ordinary investors to trade, and day trading became a popular pastime.
The peak
The technology-heavy Nasdaq Composite rose about 86% in 1999 alone. According to Goldman Sachs, the Nasdaq's market value grew from 11% of the New York Stock Exchange's in 1990 to 80% by December 1999. On 10 March 2000, the Nasdaq peaked at about 5,048.
The crash
Several factors turned sentiment:
- The Federal Reserve raised interest rates through 1999 and 2000.
- Many internet companies were burning through cash with no clear path to profits, and investors became less willing to fund them.
- High-profile disappointments and accounting worries eroded confidence.
Prices fell sharply from March 2000 and kept falling for more than two years. The Nasdaq reached a low of about 1,140 on 4 October 2002, roughly 77% below its peak. Declines spread to technology markets in Tokyo, Seoul, Frankfurt, London and Paris.
Casualties and survivors
Hundreds of internet companies went bankrupt or were sold for a fraction of their value. Famous failures included online pet-supply seller Pets.com, online grocer Webvan and fashion retailer Boo.com. Many telecom companies that had borrowed heavily to build networks also collapsed.
Some survivors went on to dominate the next era. Amazon's shares fell by more than 90% from their peak, but the company survived and became one of the world's most valuable businesses (see How Global Giants Began: Amazon). The lesson: the technology was real, but most of the companies were not worth their prices.
Scandals and the 2001 recession
The end of the boom exposed accounting frauds at companies such as Enron (2001) and WorldCom (2002), damaging trust in corporate reporting. Congress responded with the Sarbanes-Oxley Act of 2002, tightening rules for company accounts and auditors.
The US economy entered a recession in 2001, deepened by the September 11 attacks. The Federal Reserve cut interest rates sharply, to 1% by 2003, a policy that later contributed to the housing boom (Part 16).
A 15-year recovery
According to Goldman Sachs, the Nasdaq did not reach a new all-time high until 23 April 2015, about 15 years after its 2000 peak.
Lessons for investors today
- A real revolution can still be a bubble. Being right about a technology does not mean every company or price will win.
- Profits matter eventually. Businesses without a clear path to profit depend on investors' willingness to keep funding them.
- Concentration is risky. Investors who held only tech stocks suffered most.
- Beware of new valuation rules. When people say old measures no longer apply, be cautious.
- Some winners emerge, but picking them in advance is very hard.
In Part 15, we look at Argentina's dramatic collapse in 2001, when a currency board broke and the government defaulted.
Sources
Great Financial Crises: the full series
- Part 1: Tulip Mania (1637)
- Part 2: The Mississippi and South Sea Bubbles (1720)
- Part 3: The Panic of 1907
- Part 4: The Wall Street Crash and Great Depression
- Part 5: Weimar Hyperinflation (1923)
- Part 6: The 1970s Oil Shocks and Stagflation
- Part 7: The Latin American Debt Crisis (1982)
- Part 8: Black Monday (1987)
- Part 9: Japan's Bubble and Lost Decades
- Part 10: The Savings and Loan Crisis
- Part 11: The Mexican Peso Crisis (1994)
- Part 12: The Asian Financial Crisis (1997)
- Part 13: Russia's Default and LTCM (1998)
- Part 14: The Dot-Com Bubble (2000) (you are here)
- Part 15: Argentina's Collapse (2001)
- Part 16: The Global Financial Crisis (2008)
- Part 17: Iceland's Banking Collapse (2008)
- Part 18: The Eurozone Debt Crisis
- Part 19: The Covid Crash (2020)
- Part 20: The 2023 Banking Turmoil
This series is for education only and is not investment advice. Figures are taken from the sources listed and other commonly cited historical records, and may vary slightly between sources.
