2. outlaine
What is the dot com bubble?
What happened with the dot com bubble?
How did companies and individuals suffer?
What was the impact of this bubble in the financial sector?
Reference
3. What is the dot com bubble?1
An rapid rise in equity markets fueled by investments in internet-based
companies. During the dotcom bubble of the late 1990s, the value of
equity markets grew exponentially, with the technology-dominated Nasdaq
index rising from under 1,000 to 5,000 between 1995 and 2000.
4. What is the dot com bubble?2
The dotcom bubble grew out of a combination of the presence of speculative
or fad-based investing, the abundance of venture capital funding for startups
and the failure of dotcoms to turn a profit. Investors poured money into
internet startups during the 1990s in the hope that those companies would
one day become profitable, and many investors and venture capitalists
abandoned a cautious approach for fear of not being able to cash in on the
growing use of the internet.
5. What happened with the dot com bubble? 1
By applying that definition and noting the last month that changes in stock
prices were coupled with changes in their underlying dividends per share
before the Dot Com Bubble began, we identified April 1997 as the true
starting point in time for the Dot Com Bubble. Likewise, we identified June
2003 as being the first month following the end of the period in which
changes in stock prices and their dividends per share were decoupled from one
another.
6. What happened with the dot com bubble?2
The valuations are different. The real poster child of the 2000 mania was
Cisco Systems CSCO, +1.37% — briefly the world’s biggest company by
market value. At the peak, Cisco stock was valued — I am not making this
up — at 270 times the per-share earnings of the previous twelve months.
Look at the biggest stocks in the Nasdaq Composite today. Apple AAPL,
+2.67% and Microsoft MSFT, +0.20% are 17 times trailing earnings,
according to FactSet. Google’s GOOG, +1.81% [GOOG] . Baidu
BIDU, +0.10% the Chinese Internet stock, is 35 times. These are
certainly not cheap. They are not value stocks. But they are not 2000
levels.
7. How did companies and individuals suffer?
Although many families experienced hardship, certain groups were affected
disproportionately. Young people, for example, suffered a heavy impact from the
unemployment crisis. Each year brought a new wave of recent graduates into the
workforce, adding to the masses of young people already facing dismal job
prospects. Certain industries, such as construction and manufacturing, were hit
particularly hard. Construction unemployment rates nearly tripled from 2007 to
2010, while manufacturing unemployment jumped from 4.3 percent in 2007
to 12.1 percent in 2009.
8. What was the impact of this bubble in the financial sector?1
By the time the housing bubble was close to bursting, the financial sector had been
deregulated to an extent not seen since before the Great Depression. Globalization
only served to reinforce the inflation of the bubble. Movement of capital by
investment banks and hedge funds across borders is only lightly regulated. So the
problems discussed earlier, in which there was inadequate oversight of bank
investments and loansand of the management of riskwere magnified because
there was no such oversight at all when it came to capital investments from
overseas.
9. What was the impact of this bubble in the financial sector?2
Because foreign investors were parking their excess funds in the U.S. financial
system (recall that that they had these funds in no small part as a result of years of
trade surpluses with the United States), investment banks and hedge funds possessed
more capital with which to take on more risk and more debt (with historically
low interest rates serving as another incentive), in order to multiply their returns.