Does AI Know About Nasdaq's Drawdowns?

Harry MamayskyAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

I asked Google's Gemini large language model (LLM) to opine on the historical drawdowns of the Nasdaq 100. The results, though not perfect, are good enough that investors need to start paying attention.

An important question one should ask before committing capital to a new investment is how much it might lose in a bad market scenario, and how long it might take for the investment to recover to its prior peak. In finance parlance: How big is the potential drawdown and how long is it likely to last? Admittedly, you don’t need AI to answer this question. Bloomberg users can get the answer in a few minutes thanks to the charting tools provided by its software. If you use Google’s or Yahoo’s finance data website, it will take a few minutes longer because you will likely need to download the data to a spreadsheet and do the calculation manually.

Let’s consider the QQQ ETF, which tracks the Nasdaq 100 index. According to Bloomberg, QQQ experienced an 83% drawdown from early 2000 to mid-2002 and did not recover to its prior peak until after 2014. There was another drawdown during the global financial crisis (GFC, starting in 2007), which saw QQQ decline by 53.5% relative to its 2007 high. The recovery time from this one was much shorter, with the market returning to its prior peak sometime in 2010. (The actual timing of each drawdown episode was determined by me; but the visualization uses a function from Bloomberg.)

US equity

Another, relatively minor drawdown, happened after the onset of COVID 19 in early 2020, which saw QQQ fall by close to 30% before fully recovering and then going on to set new all-time highs later in 2020.