It may be up 37% in 2013 but don't expect another 25% increase in 2014, say two strategists.
If investors in the S&P 500 index are having a great year, people who bought the NASDAQ Composite Index are having a fantastic year. While the market benchmark S&P 500 is up 28%, the NASDAQ is up 37.5%. Only six times in the last quarter century have returns been so high.
Only recently, the NASDAQ traded once again above 4,000. That's territory not seen since 2000, when the NASDAQ was coming off its highs.
Back at the end of 1999, the NASDAQ breached the 4,000 mark for the first time. By March 2000, it crossed the 5,000 only to begin its fall back to 1,114 by October 2002.
If the NASDAQ were to have another good year, it could get to 5,000 once more. It wouldn't have to be as good of a year as 2013, either. The 5,000 level is a little more than 20% higher than where it is today. How likely is that?
Let's look at the data. Since 1987, the NASDAQ has given investors about a 10% annualized return. That means if you had put your money in the NASDAQ on January 1, 1987 and did nothing for the next 26 years, you would have an account that looks like you've been earning 10% per year on your money.
Except that's not quite how it panned out. Returns on the NASDAQ were very volatile during the last quarter century. The standard deviation of returns was 30%. So, basically, for a little more than two-thirds of the time, your returns were in a range between
-5% -20% and +25% +40%. Meanwhile, the S&P 500 index gave slightly higher returns (around 11%) with less volatility; two-thirds of the S&P 500's returns during that period fell between +2% -7% and +20% +28%.
Meanwhile, in the six times the NASDAQ was up more than 30% since 1987, the average return the following year was 18%. That includes the 86% up year in 1999 and the -39% drop in 2000. Take out those two outliers and the average is more like 16%.
The likelihood of the NASDAQ to have another up year and hit 5,000 is low, says CNBC contributor Andrew Busch, editor and publisher of The Busch Update.
"Twenty-five percent is a big number to make after 35%," says Busch. "So, [it's] not likely."
Instead, Busch is has a more modest upside target for the index.
"The level I have for the NASDAQ is the 4,292 level," says Busch. "That's where we bumped up and hit there back in July 2000. And, I expect that to be the target that we might get to next year."
The NASDAQ behaves less like the S&P 500 and more like Japan's benchmark Nikkei index, says Busch.
"I look at the NASDAQ – because it was so crazy back in the late '90s and early 2000 – somewhat more like the Nikkei than rather the Dow. As everyone knows, the Nikkei's top was 37,000 and we're still almost 50% below that. So, the fact that we're at 4,000 is a good sign."
Like Busch, CNBC contributor Gina Sanchez, founder of Chantico Global, also thinks the NASDAQ won't likely hit 5,000 in 2014.
"I think 25% is going to be a pretty tough place for it to get to," says Sanchez.
Sanchez sees the index's highflyers like Facebook and Amazon as having propelled the NASDAQ above 4,000 but having difficulty maintaining their high relative valuations in the future.
"But, there are even other great, forgotten parts of the NASDAQ that could continue to go up like the biotechs," says Sanchez. "I think the biotechs are really ignored."
Just don't count of biotech companies to bring the NASDAQ above 5,000, warns Sanchez.
"The pieces of the NASDAQ that are forgotten aren't really large enough to drive the NASDAQ another 25%," says Sanchez. "But that's not to say there aren't parts of the tech index that are worth buying."
To see the analyses by Busch and Sanchez on what's next for the NASDAQ, watch the video above.
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[Thank you to commenter "Bill" for catching an issue with the one-sigma range calculation.]
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