After a disastrous year in 2022, when it was down about 33%, the Nasdaq Composite Index is off to a solid start in 2023. It had its best January since 2001, up 10.7%, and it has pretty much maintained that level of performance as it remains up about 9.6% year to date (YTD) as of market close on March 9.

Where does it go from here? There are a lot of mixed signals out there, with some predicting another correction, while others are optimistic that the worst is behind us. If you are wondering whether or not it is safe to invest in the Nasdaq right now, consider these three points.

A history of bouncing back

Only twice in its nearly 50-year history has the Nasdaq Composite had two negative years in a row. The first was in 1973 and 1974 when it fell 31% and 35% in those years, respectively. There are some parallels between that period and now, as inflation was growing at above average rates, the economy was in recession, interest rates were high, and unemployment was rising. But there are some key differences too. Inflation is going down this year, whereas it continued to rise in 1974, unemployment is still extremely low, and the nation has not yet had a recession -- although one is possible this year.

Two business people looking at data on screens.

Image source: Getty Images.

The other time that the Nasdaq dropped for at least two years straight was from 2000 through 2002, when it fell 39%, 21%, and 31% in those years, respectively. But that was brought on by the dot-com bust, as the market became overvalued after surging throughout the 1990s. Then, conditions were exacerbated by a recession and the Sept. 11 attacks.

But on every other occasion, even during the Great Recession, the Nasdaq bounced back with a positive year after a negative year.

Check the valuation

While the 2000 to 2002 cycle was different in that inflation was low and interest rates were reduced to stave off a longer recession, there was one major similarity. In 2000, like 2021, the market, specifically the technology sector, was way overvalued.

Just like the valuation of a stock is a key indicator of whether it is overvalued, and thus in jeopardy of falling back to a historical average, the valuation of an index is also a key metric for gauging the overall market. To determine the market's overall valuation, a good indicator is the Shiller price-to-earnings (P/E) ratio, a 10-year, inflation-adjusted gauge of the valuation of the S&P 500.

^IXIC Chart.

^IXIC data by YCharts.

In January of 2000, it was at an all-time high of 44. That's roughly twice the historical mean -- which is somewhere between the high teens and low twenties. By January of 2003, it was back down to about 22 -- and (not coincidentally) the bear market was over and the market turned north again.

Fast forward to the fall of 2021, and the wildly overvalued market had a Shiller P/E ratio of 38 -- not as high as 2000, but it was at its the highest level since 2000. The market proceeded to crash thereafter, with the Nasdaq down 33% and the S&P 500 down 19% last year.

So where are we now? The Shiller P/E ratio is at about 28, which suggests that it is down, but still above the historical average. That means it still is slightly overvalued and that could indicate that the market may go through another correction.

Then again, no two markets are the same, and these are only guidelines to give you a sense of what has happened in the past and what caused these events to happen.

Is it safe to invest?

So is it safe to invest in the Nasdaq right now? The answer is pretty much always going to be "yes," unless we're staring at a bubble situation or a deep recession.

As always, there may be certain stocks in the index to avoid, or buy hand over fist, but investing in the larger index or the Nasdaq 100 via an exchange traded fund (ETF) makes a lot of sense for a long-term investor. 

The bottom line is, the Nasdaq Composite has posted an annualized total return of 15.3% since inception and 14.8% over the last 10 years as of March 9. Even if it falls back and finishes negative this year, the focus should always be on the long-term, and over the long-term, there has been few better investments than the Nasdaq.