Investors are getting ready to wrap up 2023 and put a bow on it. It's been a banner year for stocks. If you've paid any attention to the stock market this year, you probably already know that artificial intelligence (AI) is a big reason why.
Excitement over generative AI has helped send tech stocks soaring this year, with AI chipmaker Nvidia more than tripling its stock price. Meanwhile, investors have pumped up stocks like Microsoft, Alphabet, Oracle, and others with direct exposure to generative AI.
Through Dec. 20, the Nasdaq Composite (^IXIC 2.02%) is up 41.7% for the year, recouping most of 2022's losses when the index plunged 33%. If this year's gains hold, it will be the sixth time since the Nasdaq's founding in 1971 that the tech-heavy index gained more than 40% in a single year.
The table below shows the Nasdaq's performance in each of those five years.
| Year | Nasdaq Performance |
|---|---|
| 1991 | 56.9% |
| 1999 | 85.6% |
| 2003 | 50% |
| 2009 | 43.9% |
| 2020 | 43.6% |
| 2023 | 41.7% (as of Dec. 20) |
Source: Macrotrends.net. Chart by author.
Looking at that chart, you probably know why the Nasdaq soared in some of those years. 1999 capped the end of the dot-com boom, while 2009 marked the start of the rebound from the 2008-09 Great Recession. 2020 was the surge during the pandemic when technology became a priority around the world.
The other two years might be less familiar to investors. 2003 marked the end of the dot-com bust capitulation after three years of plunging Nasdaq prices and the beginning of the recovery. In 1991, meanwhile, stocks benefited from falling interest rates, a recovery from a decline in 1990, and a quick victory in the Gulf War.
Image source: Getty Images.
What history says about Nasdaq boom years
The chart above only gives us so much information. In order to understand the forecasting ability of those growth years, we have to look at how the Nasdaq performed in the years following and preceding, which you can see below.
| Year | Nasdaq Performance | Prior Year result | Following Year Result |
|---|---|---|---|
| 1991 | 56.9% | -17.8% | 15.4% |
| 1999 | 85.6% | 39.6% | -39.3% |
| 2003 | 50% | -31.5% | 8.6% |
| 2009 | 43.9% | -40.5% | 16.9% |
| 2020 | 43.6% | 35.2% | 21.4% |
| 2023 | 41.7% (as of Dec. 20) | -33.1% | TBD |
Source: Macrotrends. Chart by author.
You might notice a couple of patterns looking at those numbers. First, four of the six top years on the Nasdaq, including the current one if it holds, came after sharp drops in the previous years. In other words, these were the start of rebounds or new bull markets, and investors capitalized on cheap stock prices at the time. Tech stock valuations on Magnificent Seven stocks were certainly low at the start of this year, as well, and buying them has paid off.
Additionally, you'll notice that in 4 of the 5 years above, the Nasdaq posted gains in the following years, and in 3 of the 5 years, they were well into the double digits. 1999 seems like an outlier among the group, as that year marked the end of an unprecedented bull run for the Nasdaq when the index jumped more than 400% over a five-year period, before giving up much of those gains in the dot-com bust.
I also think 2020 was a unique year, given the impact of the pandemic, the surge in demand for technology that it caused, and the rush into stocks that followed a gusher of stimulus payments.
The current market bears a closer resemblance to years like 1991, 2003, and 2009, when tech stocks emerged from prior slumps. Stocks benefited from falling or low interest rates in all three of those years, as well. While interest rates rose a bit in 2023, expectations of cuts in 2024 have led stocks to surge in recent weeks.
What will the Nasdaq do in 2024?
Throwing out the two outlier years of 1999 and 2020 above, the Nasdaq registered returns of 15.4%, 8.6%, and 16.9% -- or an average of 13.6% -- in the respective three years that followed the other boom years. That isn't a forecast but should give investors some confidence that the Nasdaq can keep moving higher after 2023's surge.
Of course, history won't determine the index's performance in 2024. That will be decided by:
- The performance of big tech stocks like Apple, Microsoft, and Alphabet
- Macroeconomic conditions
- Anticipation of new AI technologies
- The direction of interest rates
- Unforeseen factors
However, with the generative AI boom only picking up steam, the Nasdaq still down about 8% from its all-time high, and big tech stocks reporting accelerating revenue growth, it seems like a good bet that the Nasdaq will keep moving higher in 2024. That's also the pattern we've seen in the Nasdaq historically.
