The Dot-Com Crash of 2000-2002

The second in our series documenting the greatest Wall Street crashes of all time...

dot com pop In Part 2 of our stock market crash history series, we examine the dot-com crash - a two-year market downturn that eviscerated more than $5 trillion in market value between March 2000 and October 2002.

The dramatic fall of a tech-heavy Nasdaq Composite sheds insight into how this stock market crash went down...

From a March 10, 2000, high of 5,048.62, the index tumbled to 1,139.90 on Oct. 4, 2002, for a whopping 76.81% drop. (The Dow Jones and S&P 500 also suffered, albeit less intensely - down 27.38% and 43.19%, respectively.)

dot com crashNasdaq's March 2000 high wasn't seen again for 15 years, until the index closed at 5,096 on April 24, 2015.

What triggered this massive loss of wealth is one of the most famous bubbles in stock market history: the dot-com bubble of 1997-2000...

Dot-Com Bubble Set Up Dot-Com Crash of 2000-2002

The Internet commercialized in 1995, creating a speculative bubble from 1997 to 2000.

Hype over a new industry caused investors to overlook traditional metrics like the price-to-earnings (PE) ratio, debt/equity ratio, and amount of free cash flow. People quit their jobs to become day traders. Millionaires were made overnight. Companies that barely had business plans went public.

The Nasdaq rose 290% from January 1997 to March 2000. Microsoft Corp. (Nasdaq: MSFT) and Intel Corp. (Nasdaq: INTC) became the first "new economy" companies - and the first Nasdaq issuers - to be included in the Dow Jones Industrial Average. In 1999, 457 companies went public.

When the dot-com crash followed, the IPO trend shifted dramatically:

Number of IPOs by Year
Year # IPOs
1996 677
1997 474
1998 281
1999 477
2000 381
2001 79
2002 66
2003 63

Of the 79 companies that went public in 2001, none doubled on the first day of trading.

According to tech merger and acquisitions analysis firm Webmergers Inc., there were between 7,000 and 10,000 Internet-related companies at the height of the bubble that had received formal funding.

But they failed in droves during the dot-com crash.

9/11's Role in the Dot-Com Crash

While the dot-com bubble burst caused the crash, the Sept. 11, 2001, terrorist attack on U.S. soil accelerated it.

The New York Stock Exchange and Nasdaq closed for four trading sessions (the longest shutdown since 1933) to prevent a total meltdown, but the event still rocked markets.

On Sept. 17, 2001, markets reopened. The Dow Jones fell 7.13% (684 points) -- the record for the largest percent loss and third-largest point loss in one trading day in its history. The Dow lost 14% that week -- the NYSE's biggest-ever weekly loss. The S&P fell 11.6%, and an estimated $1.4 trillion in value was lost in those five days of trading.

"At least 4,854 Internet companies have either been acquired or have shut down in the three years since the dot com investment boom peaked in Q1 of 2000," the March 2003 report read.  "As measured in total companies affected, Internet destinations (Web sites that offer content or e-commerce services) accounted for most of the activity, seeing 1,483 acquisitions and a whopping additional 608 failures in the three-year period."

The report added that Internet infrastructure companies saw 1,761 acquisitions and 196 shutdowns from 2000 to 2003. Internet-related consulting firms and providers of Internet access services accounted for the remaining transactions and casualties.

Despite the failures, some companies notably survived. For example, Cisco Systems Inc. (Nasdaq: CSCO) lost 86% of its share price, but made it. And a rare few, like Inc. (Nasdaq: AMZN), Google Inc. (Nasdaq: GOOG, GOOGL), and eBay Inc. (Nasdaq: EBAY), weathered the storm - shares are now worth upwards of 3,000% more than they were in their dot-com bubble days.

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Memories of the dot-com bubble kept investors away from new web-based businesses long into the 2000s. But the runaway popularity of companies like Facebook Inc. (Nasdaq: FB) have lured them back...

The dot-com crash of 2000-2002 is the second in our series of the greatest stock market crashes in U.S. history - the first covered the Stock Market Crash of 1929, here.

Stay tuned to for our next installment, and tweet the author @TaraKateClarke with any comments.

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