What led up to it
The internet became a commercial medium in the mid-1990s. It was clear that it would change business; it was not clear which companies would benefit, or when. That combination, a real change with an unknowable outcome, is the usual setting for a boom.
Money was easy to raise. Venture capital funded new companies, and stock markets were willing to buy their shares at flotation before they had made a profit, sometimes before they had much revenue. New measures were used in place of earnings, such as the number of visitors to a website. Analysts at the banks that sold the shares also published research recommending them.
A share that doubles on its first day of trading is an advertisement for the next flotation. Through 1998 and 1999 that happened often.
What happened, in order
- August 1995The flotation of an early web-browser company closes its first day far above the offer price. It is usually taken as the start of the internet share boom.
- 1998–1999Flotations of internet companies multiply, many with no profits. The Nasdaq Composite rises by more than 85% in 1999 alone.
- From June 1999The Federal Reserve begins raising interest rates. Six increases by May 2000 take its target rate to 6.5%.
- 10 March 2000The Nasdaq Composite closes at 5,048.62, its peak.
- April 2000Technology shares fall heavily, with the worst of it in the week ending 14 April. Companies that had relied on raising new money find they cannot.
- 2001The United States economy is in recession from March to November. After the attacks of 11 September the New York markets are closed for four trading days.
- July 2002After accounting scandals at several large listed companies, Congress passes the Sarbanes–Oxley Act.
- 9 Oct 2002The Nasdaq Composite closes at 1,114.11, its low, about 78% below the peak of March 2000.
- April 2003Regulators and a group of large investment banks conclude a settlement over conflicts of interest in the banks’ share research.
- April 2015The Nasdaq Composite closes above its March 2000 peak for the first time, fifteen years on.
What changed afterwards
- The Sarbanes–Oxley Act of July 2002 made the chief executives and finance directors of listed companies personally certify their accounts, tightened the rules for auditors, and created a public body to oversee them.
- A settlement in 2003 between regulators and large investment banks required share research to be separated from the business of selling flotations.
- In 2000 the Securities and Exchange Commission adopted a rule requiring companies to release important information to all investors at once, not to favoured analysts first.
- Many companies disappeared. Some that survived the fall later became among the largest in the world, which is part of why the episode is hard to draw simple conclusions from.
What it helps a trader to understand
- The story was true and the prices were still wrong. Being right that something will matter is different from knowing what a share in it is worth.
- When earnings cannot support a price, other measures tend to be found that can. A new yardstick introduced during a boom is worth a second look.
- Companies that needed new money every few months were solvent only while markets stayed open to them. The fall in share prices and the failure of the businesses were the same event.
- The index took fifteen years to regain its peak, and it did so with a different set of companies in it. An index recovering is not the same as its original members recovering.
These are observations about how markets and rules work, drawn from one episode. They are not advice, and they do not say that anything like it will or will not happen again.
What was knowable then?
It is easy to judge an episode once its ending is known. This exercise takes three moments from the timeline above, one at a time. At each it shows only what had been made public by then, asks a hypothetical question with three plain choices, and then shows what came next and what each choice would have meant.
The text headed “what had been made public by then” is this site’s own summary of the record, written afterwards. It is not a contemporary document and nothing in it is a quotation. The position described is imagined. No choice is marked right, there is no score, and nothing is stored.
Moment 1 of 3: From June 1999. The curve is drawn as far as this moment and nothing after it is shown.
Illustrative shape, not market data. The curve sketches an index of technology shares: the same hand-made line as at the top of this page, on a scale of 0 to 100 with no axis values, here drawn only as far as the moment reached.
Moment 1 of 3 · From June 1999
What had been made public by then
It is the start of 2000. Flotations of internet companies have multiplied, many of them with no profits. The Nasdaq Composite rose by more than 85% in 1999 alone. The Federal Reserve has been raising interest rates since June 1999.
Suppose someone holds a fund of technology shares. After a year like 1999, what would such a holder do?
A hypothetical for study, not advice. It does not say what anyone should have done then, or what to do now.
What is uncertain or disputed
The index levels are the Nasdaq Composite’s published closing values. The peak during the trading day on 10 March 2000 was higher than the closing figure given here. What ended the boom is not agreed: rising interest rates, a run of poor results, a court ruling against a large software company in early April 2000 and plain exhaustion of new buyers are all cited. No single trigger is established.
Questions people ask
- When did the dot-com bubble burst?
- The Nasdaq Composite index reached its peak close of 5,048.62 on 10 March 2000 and fell heavily in April 2000. The decline continued for two and a half years, to a low of 1,114.11 on 9 October 2002.
- How far did the Nasdaq fall after 2000?
- From its peak close on 10 March 2000 to its low on 9 October 2002 the Nasdaq Composite fell about 78%. It did not close above the 2000 peak again until April 2015.
- What caused the dot-com bubble?
- A real technological change whose winners could not yet be known, plentiful money for new companies, flotations of firms without profits, share research written by the banks selling the shares, and the pull of prices that had already risen. There is no agreed single cause of the peak or of the turn.
The words on this page
Where this account comes from
The published record of the Nasdaq Composite index, Federal Reserve and Securities and Exchange Commission records, and the business-cycle dates published by the National Bureau of Economic Research.
A number is given on this page only where it is famous and certain. Nothing here is a quotation.
Documents
- Sarbanes–Oxley Act of 2002 (Public Law 107-204)United States Congress · 30 July 2002The personal certification of accounts by chief executives and finance directors, the tighter rules for auditors and the public body that oversees them.
- Selective Disclosure and Insider Trading (the final rule adopting Regulation FD)Securities and Exchange Commission · August 2000The rule that important information must be released to all investors at once.
- The global research analyst settlementAnnounced jointly by the Securities and Exchange Commission, the New York Attorney General, NASD, the New York Stock Exchange and state securities regulators · 28 April 2003The settlement over conflicts of interest in the banks’ share research, and the separation of research from the business of selling flotations.
- Announcements of the Business Cycle Dating CommitteeNational Bureau of Economic Research · 26 November 2001 and 17 July 2003The dating of the United States recession from March to November 2001.
These are public documents, named by title, issuer and date. No web addresses are given, because addresses change; the title and the issuer are what to search for. The account above is this site’s summary and does not quote them.
A history for study. Educational information, not investment advice or a recommendation to trade. What happened in one episode says nothing certain about what any market will do next.