The Dow Jones industrial average hit a record high close this week.
So where’s the Nasdaq composite index?
That tech-loaded exchange, which paced all stock indexes during the 1990s boom, has been a laggard so far this decade.
Tuesday, when the Dow finished at a record 11,727.34, the Nasdaq closed at 2243.65, about 55 percent below its record high close, set in March 2000.
The divergent paths of the two indexes reflect both a greater investor appetite for the diversified global conglomerates listed on the Dow and an aversion to the speculative frenzy that pushed the Nasdaq to an unrealistic and unsustainable value six years ago.
“There was so much froth embedded in the Nasdaq’s value at its peak,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa. “It may be another decade until the Nasdaq gets back to that level. Broadly speaking, the market is fairly valued now, given interest rates, earnings growth and the underlying economy today.”
Although the high-tech industry has recovered slowly and remains a force in the economy, creating hardware, software and services jobs and boosting the productivity of other industries, many investors have shifted their interest to other arenas. Technology stocks drove the stock market boom of the 1990s, but with the exception of Google Inc. and a few others, their role has been reduced.
Among the top-performing stocks this year have been Dow components such as General Motors Corp. and Merck & Co. Nasdaq technology stalwarts Microsoft Corp. and Intel Corp., by contrast, have been flat or down.
Uncertainty about housing and oil prices, and jitters over events in Iraq and the Middle East, have helped drive investors toward large-cap stocks, said John Dorfman, president of Thunderstorm Capital LLC in Boston.
“If people are scared, they go toward more defensive holdings, the consumer staples or drug companies,” Dorfman said. “Technology companies tend to do better when confidence is high.”
Large-cap industrial and consumer stocks also have turned in strong earnings, fueling a strong merger and acquisition market.
“Earnings from high-quality companies continue to do well,” said James T. Swanson, chief investment strategist for MFS Investment Management in Boston. “And what’s supporting the market now is companies buying other companies, and private equity companies that see this as an opportunity to get high returns on their investments.”
Technology shares, the favorites of growth investors in the 1990s, are mostly on the sidelines this time. Part of it is a continuing hangover from the dot-com days.
“The Nasdaq went parabolic at the end of last decade and beginning of this decade,” Zandi said.
“Technology stocks were never worth as much as their value at the peak or as little as their value when they cratered. Nasdaq’s view of technology today is consistent with reality.”
Businesses around the globe have resumed buying technology products and services, Zandi said, but it could take the emergence of a new product or trend, such as the desktop computer or the Web, to heat up the technology sector. And the timing of such trends is difficult to predict, he noted.
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Dorfman agrees that the Nasdaq’s slow crawl back is largely a function of how overvalued it became during the 1990s.
“In the first quarter of 2000, when the Dow peaked in January and the Nasdaq peaked in March, they were both overvalued, but the Nasdaq was ridiculous,” he said. “Both have corrected, but the Nasdaq is still a little expensive in my opinion.”