The Nasdaq Just Did Something It Has Only Done 8 Times Since 1990, and It Could Signal a Big Move in the Stock Market

The Nasdaq Composite (NASDAQINDEX: ^IXIC) is one of three major U.S. financial indexes, the other two being the S&P 500 (SNPINDEX: ^GSPC) and the Dow Jones Industrial Average (DJINDICES: ^DJI). Whereas the S&P 500 is the most popular benchmark for the U.S. stock market, and the Dow Jones is considered a barometer for blue chip stocks, the Nasdaq is a growth-focused index weighted heavily toward the technology sector.

In November 2021, the Nasdaq dropped into a bear market amid recession fears brought on by runaway inflation and rapidly rising interest rates. The index declined 36% before reaching its bear market low on Dec. 28, 2022. But the recession many economists expected has yet to materialize. Instead, economic growth accelerated last year, and many stocks rebounded sharply, helped along by cooling inflation and excitement about artificial intelligence.

The Nasdaq finally reached a new record high on Feb. 29, 2024. Crossing that threshold made the new bull market official, a development that has historically portended substantial gains for investors. Specifically, the Nasdaq has only been through eight other bull markets since 1990, and the index has generally moved much higher during those periods.

Read on to learn more.

History says the Nasdaq Composite could soar 157% by April 2026

Some investors use the term bull market loosely, often to describe a substantial gain following a recent low. But other investors subscribe to a more precise definition, which stipulates that two things must happen for a bull market to occur:

  1. The index in question must rise 20% from a bear market low.

  2. The index must also reach a new record high.

What makes that definition tricky is the timing. A bull market technically begins when an index reaches its bear market low, but it does not become official until it reaches a record high. For instance, the current Nasdaq Composite bull market started when the index reached its bear market low on Dec. 28, 2022. But it was not official until 14 months later, when the index reached a new high on Feb. 29, 2024.

With that in mind, the Nasdaq has experienced eight complete bull markets since 1990. The table below provides details on each of those events.

Bull Market Start Date

Nasdaq Composite Return

Duration (Days)

Oct. 16, 1990

519%

2,834

Oct. 8, 1998

256%

516

May 23, 2000

35%

75

Oct. 9, 2002

157%

1,848

Nov. 20, 2008

26%

47

March 9, 2009

539%

3,462

Dec. 24, 2018

52%

395

March 23, 2020

134%

606

Average

215%

1,223

Data source: YCharts. Note: Percentages and averages have been rounded to the nearest whole number.

As shown above, the Nasdaq returned an average 215% during the eight bull markets that have taken place since 1990, and it realized those returns over an average of 1,223 days (about 40 months). Put differently, the Nasdaq returned about 41% annually during past bull markets. We can use that information to make a somewhat educated guess about the future.

Specifically, the Nasdaq has advanced 58% since the current bull market began about 15 months ago. That leaves implied upside of 157% over the next 25 months. In other words, the Nasdaq should return 57% annually through April 2026 if its performance aligns with the historical average. I call that a somewhat educated guess because past bull markets have varied greatly in terms of returns and duration, which means there is a great deal of uncertainty baked into my estimate.

Ultimately, the economic climate plays a major role in how the index performs over any period, and past performance never guarantees future results. For instance, the current bull market follows a pandemic that pushed U.S. inflation to its highest level since 1981. That prompted the Federal Reserve to embark on its most aggressive interest rate hike campaign in decades. Those events could impact the economy for years to come, so the current bull market may not follow the historical pattern.

In fact, I would be surprised if the Nasdaq returned anything close to 157% over the next 25 months. I say that because the S&P 500, the most popular benchmark for the U.S. stock market, currently trades at 25.6 times earnings. That is a significant premium to the 10-year average of 21.2 times earnings, indicating that many stocks have historically expensive valuations.

Short-term results are variable, but history says long-term investors will be well rewarded

Predicting the future performance of the stock market is impossible, but some forecasting methods are better than others. In most cases, rather than focusing on specific events like bull markets, it makes more sense to consider performance across all market environments. That strategy should yield more reliable results simply because it accounts for more data points.

With that in mind, the Nasdaq Composite has increased 3,500% since 1990, compounding at an annual rate of 11%. That period covers a broad enough range of economic climates that similar returns are likely in the future. That does not mean the index will return 11% every year, but rather that its average return will land somewhere around 11% per year over the next three or four decades.

Investors can capitalize on that data by purchasing an index fund that tracks the Nasdaq Composite. Alternatively, given the technology-heavy nature of the index, investors could also benefit from adding some technology stocks to their portfolios. That is especially true of companies in fast-growing markets like artificial intelligence, cybersecurity, and robotic process automation.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The Nasdaq Just Did Something It Has Only Done 8 Times Since 1990, and It Could Signal a Big Move in the Stock Market was originally published by The Motley Fool