Forget the S&P 500, watch the NASDAQ Composite

S&P 500 Watch

Three days ago the S&P 500 set a new record. But what about the other closely followed index on the U.S. stock market - the NASDAQ Composite index?

The NASDAQ index is a benchmark that closely follows the fortunes of US listed technology companies. The information technology companies in the limelight – Apple, Google, Facebook, and Amazon – are all listed on the NASDAQ stock exchange. The S&P 500 is more representative of all sectors of the U.S. economy – both traditional and the new.

During the height of the dot com boom, shares of technology companies soared – the benchmark setting an all-time high on March 6, 2000 of 5048.6 on a closing basis. Now the NASDAQ is within a touching distance of that all-time high – it closed at 4924.7 yesterday.

Fifteen years to come close to setting a new high is a brutally long time for any investor! Note after the dot com bust in 2000, the S&P 500 took just seven years to once again set a new high.

The point is that when it comes to investments, valuation – the price one pays for the asset - is just as important as the growth prospects of the asset (a company or a group of companies in an index). 

On March 6, 2000 when the NASDAQ closed at 5048.6, it traded reportedly on a trailing P/E (Price earnings ratio) of 175! Such extreme valuation punishes investors for an unacceptably long time. Today the NASDAQ trades at a somewhat modest valuation of 31.