Bubble Trouble

By Daniel Kadlec

My weekly paddle-tennis game has taken an interesting turn. I play with a trader and two money managers, and lately, points lost on the NASDAQ have been discussed more hotly than those lost on the court through blurred vision and spot rule revisions. To sharpen our focus and have a bit of fun, at our last outing we each made a stab at how long it will take the NASDAQ to get back to its March 10 record close of 5,049. The surprising results spurred me to widen the sample last week with calls to 10 other Wall Street types. Their range of answers ran along the same lines as that of my paddle-tennis pals. The quickest predicted recovery was 12 months; the most drawn out, seven years. The biggest cluster by far was around a five-year recovery, which is the eye opener.

Five years to get even? My sense is that many, if not most, individuals harbor hope that tech stocks, which dominate the NASDAQ, will spring back to life much sooner than that. With the NASDAQ down nearly 50%, it's logical to presume it has no place to go but up. Logical, but not necessarily correct. We're unwinding a bubble, and it's going to take time. Even when the decline finally ends, there will be no fast recovery.

This is not a call to sell all tech stocks. Lighten up, maybe. There are plenty of other things to own, including bonds. Before tech lifts off again, some surprise sector will have soared. Who thought utilities would rise 40% this year? Reasonable candidates to charge ahead next are energy (if oil stays over $25 per bbl.) and regional banks (if severe credit problems don't surface and the Fed cuts rates). Get rid of margin debt, definitely. And lower your expectations for future returns. But stay invested. Everyone in my small survey expected the Dow to be hitting new highs sometime next year.

Like a lot of folks, I hadn't been giving a NASDAQ recovery much thought. But I am now, and here's the way I see it:

Tech stocks are still over-owned. Most individuals, especially those who trade online, haven't yet given up on tech as the market leader. Institutions are getting to that point. That's why every tech rally gets squashed. The big boys are selling into strength to lighten up without going belly up. Before tech can sustain a rally, it must move to being under-owned, then start back the other way.

That's a long process, one that will probably coincide with an economic slowdown (or recession) followed by another expansion. Thinking it can all work out in just one year is absurd. But so is the most pessimistic view. Technology spending is slowing, but only temporarily. Tech remains a long-term growth industry, and when it revives, tech stocks will again outpace broader market measures.

Here's some basic math. The NASDAQ has lost half its value. To get even, it must double. At 10% a year, money doubles in about seven years. That gets you the drawn-out recovery. Yet no-dividend growth stocks should compound at 12% to 15%, implying a recovery in about five years. And I believe the market has muscle memory; having been there once, it's easier to get back. My prediction? Three years. Odds are I'm wrong. What's important, though, is that I'm mentally set for a grind. Go ahead, Mr. Market, surprise me, pleeeeze.

See time.com/personal for more on the market. E-mail Dan at [email protected] See him Tues. on CNNfn at 12:20 p.m. E.T.