The Nasdaq has fallen more than 50% since its peak a year ago but even so is still on a P/E of 166 t...
The Nasdaq has fallen more than 50% since its peak a year ago but even so is still on a P/E of 166 times.
Since the market peak of 5048.62 on 10 March 2000 the index has seen a dive towards a year low of 2109 as of 10 March 2001.
John Hatherly, head of global analysis, finds the current P/E, supplied by Bloomberg, surprising. He said: "I believed it to be around 100 but if all the losers are being calculated in then this may be right."
Grant Wilson, North American fund manager at Martin Currie, believes looking at a headline P/E can be misleading and that the components of the index need to be looked at more closely.
He said: "Some network companies take around three years before beginning to make money. It would not be a stupid idea, however, to invest in these companies even though they may have invested millions and only made a penny.
"There are also some companies whose P/Es are very large in the good times and small in the bad times. This does not mean they are expensive, just volatile."
Nasdaq's initial fall last March was followed by a secondary drop in September. Hatherly said this was as significant as its predecessor. He added: "The second stage of the fall is indicative of a more dramatic downgrading of prospects."
According to Wilson, the drop in the Nasdaq has not affected its status as a leading indicator.
He said: "It is still a very important index, which is currently a leading indicator of pessimism rather than a market.
"Indices such as the S&P 500 have not fallen as dramatically as the Nasdaq, simply because its largest ever weighting in technology was 36%, which is now down to 19%. As investors' shares have plummeted people are not feeling as rich as they once did. This is impacting consumption and pessimism has grown among consumers and fund managers alike."
For Wilson, the low level of Nasdaq and the poor sentiment surrounding it are an encouraging buy signal, even if it still has a little further to fall.
He believes the market is now at a fair value but would have to fall a further 20%-30% to be a strong buy. He added: "This may never happen as taxes are cut and interest rates come down, so people do need to be wary of missing out."
Hatherly agreed that valuations seem more reasonable but warns that the market could go lower as a result of negative sentiment. He said: "If it falls below 2000 then investors could begin to sell in panic."
Looking forward, Wilson believes the only certainty is that there will be a lot of volatility. He believes the fall can be attributed to two factors.
He said: "The peak of the market reflected stupidly high prices reached by technology stocks. If the drop has been around 60% then 40% can be explained as the correction of ridiculous prices and the remaining 10%-20% is due to a decline in profit expectations."
Of the eight sectors represented in the Nasdaq, the leading performers are currently banks and other financials, which have returned -0.95 and -0.8 respectively for the year to date.
A technology stock manages to make an appearance as the sixth highest weighted stock in the sub-sector, Homestore.com which has fallen 52% in dollar terms over the year. The bottom performing sectors year to date are computers, telecoms and biotech, which combine to constitute around 60% of the entire index.
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