Is The Nasdaq The New Dow?

One of the things I’ve been saying recently on this blog is that the Dow is full of tired companies and tired stocks. I think the Nasdaq is much more representative of the current american economy than the Dow. And when I came across this chart on Andrew Finkle’s blog this morning it got me thinking.


This shows the Dow from 1924 to 1939 and the Nasdaq from 1995 to September 2008 (two months ago). It’s too bad that the red line doesn’t go all the way to this week because it would be even more striking. That’s because the Nasdaq traded all the way down to 1300 as of last friday and is now at 1500. It’s not exactly tracing the 1929-1939 Dow, but it sure is damn close.

So the obvious question is where did the Dow go from the early 1938 bottom?

Here’s a chart that I found on the woodshedder blog:


From 1938 through the end of the war in 1945, the Dow was locked in a narrow trading range between 100 and 150 and it retested the 1938 lows in early 1942.

If the Nasdaq is the new Dow, and it sure seems like it is on many levels, then this would mean the Nasdaq will trade in the range of 1300 to 2000 for the next seven years and will retest last friday’s lows at least once more before starting a slow but steady climb sometime around 2012.

It also means that the Nasdaq isn’t going much lower from here.

Now I want to say that while history does repeat itself, it’s dangerous to take too much from exercises like this. They are fun and amazing at some level. But I wouldn’t bet the farm based on an analysis like this.

I much prefer to think about fundamentals. The best companies in the Nasdaq, like GOOG, AAPL, AMZN, CRM, ABDE, and others reached levels last week that strike me as big time bargains.

GOOG traded as low as $250/share on Monday. That’s a market cap of $78bn and an enterprise value of $64bn. That’s for a company that had operating cash flow last quarter of $2bn and certainly has the ability to earn $8bn per year of cash flow even if revenues flatten out or decline slightly. When one of the top companies in the world trades at 7.5x cash flows, that’s a signal that it’s time to start buying. Think of it this way. If you had the money and you could buy all of Google (I don’t and you can’t), you could lay out the $64bn and wait 7.5 years to get your money back and then you’d own the whole company forever after that. That’s a steal in my book.

So my gut tells me we may have seen the worst of the selling in the Nasdaq for now. But it’s also instructive to think about the kind of patience you’ll need to have with these stocks if you buy them in here. If the crystal ball of the Dow from 1929-1945 is accurate, then at best these stocks will go up around 50% in the next seven years. That’s an annual return of around 6% for the next seven years. If you are good at trading (I’m not) then of course you can do way better than that.

And of course, as I pointed out in this blog post from last week, an index is not representative of what can happen with individual stocks in it. I don’t know how invidual Dow stocks did from 1938 to 1945, but I am sure there were some that did way better than up 50%. My bet is companies like Google, Apple, and Amazon will outperform the Nasdaq as a whole from here on out. They are leaders in their markets, have dominant franchises, have strong balance sheets, and positive cash flow that I believe will survive the downturn intact. That’s why I’ve been buying them and have stepped up my purchases in the past couple weeks.

I’m battered like everyone else and have not been spared the losses that most have taken for the past year. But I am optimistic and thinking about how to make money going forward. Because as my friend Fred said to a large gathering a few weeks ago, you can’t leave cash under a mattress. You have to invest capital to make money. And that’s what I am doing with my stock market investments, my real estate and hedge fund investments, and most importantly, with our venture capital investments.

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Comments (Archived):

  1. ceonyc

    Past performance is no guarantee of future results…

    1. PlanMaestro

      However buybacks and dividends are welcomed

  2. jasonkolb

    Fred, you’re looking at the fundamentals of the companies but ignoring the fundamentals of the economy. This qualifies as not seeing the forest for the trees.The economy is hurting. BAD. There is nothing to fundamentally like about the economy, there is still a mountain of unsound debt that has to be written off, and consumers are maxed out. The home equity piggy bank is not just empty, there’s a black hole in the piggy bank. Our economy starts and stops with consumers. This has been and will continue to rape corporate earnings.Just my opinion, but I think you’re going to get your casbah rocked if you don’t look at the broader picture.For what it’s worth, I’m expecting a bounce in the markets through Christmas and then a bloodbath once the Christmas numbers start coming out. Easily taking out the lows from last week. Easily and quickly.

    1. terra210

      I think John Paulson (…, and the Blackstone Group, with their cute mocking PennyMac, ( and many others would disagree with you about the black hole of home equity. They are buying up distressed mortgage assets, and properties and have been planning on doing so for a while now.

      1. PlanMaestro

        I heard once Buffett saying something on the line that in times of crisis people go Macro instead of buying cheap stocks. Put depression numbers if you want, there are plenty of fallen angels.Non serviam

  3. howardlindzon

    i love that you are discovering some of the new voices on the markets which is what stocktwits and twitter is about…the farm system of new experts and TRUSTED voices because their past words are easily visible.Thank goodness few people get that about twitter.

  4. userX

    Good luck to you, Fred, but your readers should know, as jasonkolb & ceonyc also caution, that “the Dow from 1929-1945” is no “crystal ball” for this market. 2008 is not 1938 redux. (And no, two wars are not better than one!)Re “From 1938 through the end of the war in 1945, the Dow was locked in a narrow trading range between 100 and 150.” That’s like the Nasdaq being “locked in a narrow trading range between 1500 and 2250,” or “1100 to 1650,” as the case may be.Take your pick. However you slice it, you’ve got a pretty good sized range in there, even by today’s standards.

  5. terra210

    A great post. I think the charts do tell us something. It may not be that future trends are a reflection of past performance, but patterns do repeat themselves, for many reasons. In part because people expect them to if they are in need of seeing a road map in a sea of chaos. People who follow, are at this point. People who are leading are already setting the balls in motion to profit.

  6. Woodshedder

    Fred, good to have discovered your blog, via you linking to mine.Happy Thanksgiving!

  7. curmudgeonly troll

    I agree with your analysis, but a bear would say- trailing peak cash flow: can come down A LOT- less of that sweet, sweet cash flow will end up in shareholders’ pockets, making it less attractive to lay out the cash for stocks (1938 was after the Roosevelt reforms and we haven’t even started). Corporate, cap gains and income taxes will go up (not to mention states and municipalities are going to be bankrupt – http://globaleconomicanalys… )- risk has been repriced permanently, but interest rates will also go up to historical normsthe world has survived worse things than mortgage deadbeats and Wall Street weasels… but that doesn’t mean things couldn’t still go a lot lower.

  8. PlanMaestro

    Fred, good call on your bottom fishing, I did not thought you were going to execute it.GOOG is not very thrifty, Use Free Cash Flow (subtract CAPEX) instead of Operating Cash Flow for your analysis. If you could give some insight on where the CAPEX is going, it would be much appreciated.For the moment, I much rather have AAPL, ADBE, or even MSFT (waiting for those buybacks). In fact, I have full positions on all of them and only a half position on GOOG. Before reaching full position in GOOG, I might also buy YHOO than I find cheaper and with a potential catalyst.

  9. MarkClare

    Fred. If you want to do some fundamental analysis – have a look at our site ( It is a DCF tool with a pre-populated starting point. We are still pretty early in what we are doing. You should try it and create some valuations. Here is the link for the $GOOG page –….

  10. S.t

    This is a great post.It reminds me of a piece Ron Insana did on CNBC in late December, 1999 — comparing the 90sNasdaq to 80sNikkei. He was right on the money. It look like Andrew Finkle knows what he’s talking about.Great post. Thx.

  11. MassMan

    Fred: Great post.As the great English historian Edward Gibbon reflected: ‘I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging the future, but by the past’.One thing to be aware of is the debt bubble we are dealing with today is almost 75% bigger (measured against GDP) than it was in 1929. Which begs the question: Will the hangover be commensurate with the binge?Food for thought.Hope you had a great Thanksgiving.MassMan

  12. Alan Warms

    Fred I agree with you now is a great time to buy equities — I’ve bought goog,amzn,aapl,vclk,lamr in last week and tweeted it at — but what happened after 1945 was we won the war, and U.S. companies were best positioned to continue to grow and expand, since much of Europe’s and Japan’s industrial base had been destroyed — so there was tons of obvious upside that the Dow companies went and grabbed.I am not sure looking at that chart tells us much other than “wow what a coincidence” i would like to see a chart of P/E ratios across same period to see what has been some historical valuation lows

  13. jquaglia

    This is something that crossed my mind after I read your post from last week. After all, why are we so obsessed with the “Dow Industrials” when our economy has greatly lost and abandoned out industrial and manufacturing base. But when you say “is the Nasdaq the new Dow?” I think the answer depends on the regard in which you held the Dow in the first place. Did we see it as reflective of the US economy as a whole? Reflective of simply our industrial powers? Or did we (and still do) care so much because that’s where so much of our money was held? I think that most people flip on CNBC and legitimately take the Dow to be THE most significant index representative of our economic health-much as economist might make the same analysis with GDP numbers. Has the Nasdaq replaced that? Not yet for most people.

  14. jrh

    If we truly want to apply the lessons of ’38 to ’45, then this is what we should do:1) implement rationing and forced savings2) use the proceeds to build massive numbers of factories3) bomb the infrastructure of all other industrial companies so they have to buy our productsI think that even GM’s current management would deliver decent returns under such a scenario.But without (3), it’s hard to see where the big boost at the end will come from.

  15. Dave Hendricks

    Can we call that ‘Passive Regressive’ behavior?I just wonder is the poor economy is going to slow down the move of advertising of Dow30 companies to the web. Don’t get me wrong, I fully believe (and sell) the notion that the measurability of internet advertising. But we need these big companies to move their ad spend to the web in order for rates of growth to continue in the double-digit range. If they are hurting what will they do with their ad spend besides radically reduce it.With car, apparel, luxury, real estate, even oil prices down, will this hasten the adoption of web advertising? If no one has any money, do we want to acquire them?Could this be already priced in at $250 or $300 GOOG? Is GOOG priced because of macro economics? Or is it priced where it is because so many margin calls forced people to sell this to meet calls? Who is left to buy it back up?I am going long on Oil. Texas Tea. There is no way that Oil is gonna stay in the 40’s for very long. I would sooner bet that Oil will be back at $90 bbl (2.x) in the next 18 months than GOOG will see $500 (also about 2x).Then again, GOOG did introduce those nifty themes and that clunky new ‘phone’….hmmm maybe I will reconsider.

  16. AndyFinkle

    What i had concluded by the chart was that history DOES repeat itself… while it might not be the same economic mistakes (in the 30’s it was TIGHT monetary policy and today perhaps the mistake will be printing all this new money) the markets and people do react the same. My take based on that is no expectations for the market to go anywhere till at least 2015. So for me, for now the market remains a traders market, and the only long term investments made now should be one’s that chase