When the internet industry first started to take off in a big way, everyone wanted a piece of the pie.
Santi S via Shutterstock; Caznva
What Was the Dot-Com Bubble?
The notorious “dot-com” bubble—also known as the tech boom or internet bubble—was a period from about 1995 to about 2001 during which internet-related tech companies attracted a massive amount of attention from venture capitalists and traditional investors.
This influx of money combined with the exploding popularity of the internet in general caused the web sector to expand rapidly in terms of valuation over the course of a few years despite many companies lacking concrete paths to profitability. Low interest rates in the late 1990s made debt financing easier to acquire, further fueling the internet industry’s unchecked growth.
Eventually, around late 2000, these streams of easy money dried up, and the industry imploded, causing many tech companies to go under and ushering in a new bear market that would last for around two years and affect the entire stock market—not just the technology sector.
How Did the Dot-Com Bubble Form?
In the early 90s, the advent of web browsers made the internet much more accessible for the average consumer. Once rare, computers began to appear in more and more households in the U.S., eventually becoming somewhat of a necessity. As the popularity of computers and the internet grew, many new web companies emerged to carve out their slice of the rapidly expanding information technology and online commerce industries.
In the late 90s, low interest rates made speculative equity investments more attractive than bonds, and at the same time, innovative internet companies grew in popularity among retail investors, professional traders, venture capitalists, and institutional investors alike. When the Taxpayer Relief Act of 1997 passed, the top capital gains tax rate was lowered, providing yet another incentive for equity speculators to pour money into the fledgling internet industry.
Investment banks earned massively by facilitating IPOs for one tech company after another, and starry-eyed investors threw fundamentals like P/E ratios out the window and pumped money into young dot-com companies (most of which had yet to turn a profit) for fear of missing out on the digital gold rush that was sweeping Wall Street.
This influx of money acted like a bellows, inflating the untested internet technology industry into an overvalued bubble ripe with surface tension and ready to burst.
This graph of the value of the tech-heavy Nasdaq Composite index shows the dot-com bubble forming around 1995 and gathering value until early 2000 when it began to burst, portending a two-year bear market and mild recession.
When and Why Did the Dot-Com Bubble Burst?
It’s always difficult to identify a single catalyst that causes the bursting of an asset bubble, but in the case of the internet bubble, two factors seem to have played at least some part in the industry’s rapid decline, which began after the tech-heavy Nasdaq composite peaked on March 10th, 2000.
The first factor was rising interest rates. The Federal Reserve raised the fed funds rate (which informs most other interest rates) several times over the course of the years 1999 and 2000. Higher interest rates tend to motivate investors to move money out of more speculative assets (like internet company stocks) and into interest-paying assets like bonds.
The second factor was the onset of a recession in Japan in March of 2000. News of this recession spread fast and led to a wave of fear that triggered a worldwide selloff, moving even more money out of speculative equities and into safer, fixed-income instruments like bonds.
These two factors, among others, helped catalyze the bursting of the overinflated internet bubble. Internet stocks began to lose value, which spread fear among investors, in turn causing additional selling—this self-reinforcing process is known as capitulation, and the selloff continued until the Nasdaq hit its bottom around October of 2002.
How Long Did the Bubble Last? How Long Was the Bear Market That Followed?
Bubbles—including the dot-com bubble of the late 1990s—don’t really have definite start dates, but assuming the bubble “started” sometime around 1995 and ended when the Nasdaq composite peaked in March of 2,000, you could say the dot-com bubble grew for about five or six years before bursting. The bear market that followed lasted about two years.
Which Companies Survived the Dot-Com Collapse?
While many tech companies bit the dust during the bubble’s collapse, some persevered through the turbulence and bounced back in the years that followed. According to the New York Times, something like 48% of the companies involved in the asset bubble survived the crash, but most still temporarily lost the lion’s share of their value. The following are a few examples of now-successful companies that survived the ill-fated tech boom.
Adobe SystemsAmazon ARMASMLBooking Holdings (Priceline, Kayak, CheapFlights, etc.)eBayIBMIntuitOracle SanDisk
Which Companies Went Under During the Dot-Com Crash?
Many companies weren’t so lucky as those listed above. The following are a few internet players that met their end when the tech bubble burst or soon after.
Boo.comGlobal CrossingNorthpoint CommunicationsPets.comWebvan Worldcom
How Did the Dot-Com Crash Affect the Economy? Did It Cause a Recession?
What defines a recession varies depending on who you ask, but it would certainly be safe to say that the bursting of the internet bubble led to a pretty severe bear market. According to most analysts, the dot-com crash did cause a mild recession, but its effects were not nearly as disastrous as those of the subsequent 2008 recession caused by the implosion of the mortgage-backed securities market and the housing bubble.
Of course, many who worked in the tech sector became unemployed as the businesses they worked for saw their financing dry up. Adjacent industries, like advertising, were also affected as failing tech companies stopped pumping money into elaborate marketing efforts. Overall, it took the market about two years to get back into bull territory after the two-year dot-com recession (or bear market—whichever you prefer).
