As of right now, the Nasdaq Composite Index (^IXIC +0.42%) remains in a bear market. It stands alone among the major indexes in that regard.
But we're definitely seeing some signs that the bears could go fully into hibernation. The Nasdaq Composite Index hit a low point on Dec. 28, 2022. It's up 13% since then. Will a new Nasdaq bull market begin in 2023? Here's what history shows.
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A mixed bag
The Nasdaq Composite Index was created in 1971. In the 52 years since then, the index has finished down by 30% or more only six times, including last year's 33% decline. In three of the five previous cases, the Nasdaq entered into a strong bull market in the year after sinking at least 30%.
| Year | Nasdaq Composite Index Decline | Performance in Next Year |
|---|---|---|
| 1973 | (31.06%) | (35.11%) |
| 1974 | (35.11%) | 29.76% |
| 2000 | (39.29%) | (21.05%) |
| 2002 | (31.53%) | 50.01% |
| 2008 | (40.54%) | 43.89% |
Data source: Macrotrends. Table created by author.
Three out of five isn't bad. However, it certainly doesn't establish a clear pattern of how the Nasdaq performs after a steep decline.
The picture improves if we look at all of the Nasdaq's bad years. The index has closed the year in negative territory 14 times (including 2022). It rebounded in the subsequent year in 10 of the previous 13 periods. Two of the years when the Nasdaq fell in the following year are shown in the above table (1973 and 2000). The other exception was in 2001.
Digging deeper
Will 2023 be more like the previous years when the Nasdaq rebounded after a decline or more like the outliers? Digging a little deeper could help us answer this question.
The Nasdaq sank 35.11% in 1974 following a big drop of 31.06% in 1973. This bear market resulted from OPEC's oil embargo that rattled the U.S. economy. Although oil prices rose sharply throughout much of last year, it's fair to say that the current situation isn't nearly as concerning as the crisis of 1973 and 1974.
Let's fast-forward to the early 2000s. The Nasdaq plunged 39.29% in 2000, fell 21.05% in 2001, and then sank another 31.53% in 2023. There are some similarities between then and now. The steep sell-off a little over two decades ago followed a prolonged bull market where valuations skyrocketed. That's true of the recent Nasdaq decline as well.
However, the terrorist attacks on Sept. 11, 2001, also played a big role in the meltdown of growth stocks early in the 21st century. There isn't any comparable worry today.
Reasons for optimism
I think that looking back at history gives investors reasons to be optimistic that the Nasdaq could begin a new bull market this year. 2023 seems to have more in common with the previous years when the index rebounded strongly after a steep decline than the years when it didn't.
Even if the current Nasdaq bear market continues, there are reasons to believe it won't last much longer. Inflation is cooling somewhat, thanks to aggressive moves by the Federal Reserve. The unemployment rate is low.
Many economists are concerned that a recession could be on the way. However, U.S. gross domestic product (GDP) increased by 2.9% in the fourth quarter of 2022. This better-than-expected GDP result seems to show that the economy remains resilient.
Now could actually be a great time for investors to buy Nasdaq stocks that are still well off their highs but have great long-term business prospects. Bear markets don't last forever. And they present excellent opportunities for patient investors.
