The tech-dominated Nasdaq index soared more than 40% in 2020 and investors expecting more of the same in 2021 may need to revisit their thesis, BK Asset Management Managing Director of FX Strategy Boris Schlossberg wrote in a CNBC op-ed.
What happened in 2020?
Nasdaq’s outperformance in 2020 wasn’t without merit, according to Schlossberg. The index is full of companies that “not only survived but thrived” amid the COVID-19 pandemic. Most notably, companies with exposure to some form of virtual or at-home, saw their business skyrocket. Here is a helpful guide created by Invezz on how to invest in the Nasdaq index.
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Companies like Amazon.com, Inc. (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), and Zoom Video Communications Inc (NASDAQ: ZM) were among the stand-outs as they ensured consumers were able to conveniently purchase goods, entertain themselves, and continue conducting business as best as possible.
Investors wanted exposure to hot companies
Naturally, investors wanted exposure to companies that are best positioned to thrive during the pandemic. There is reason to believe that the work-from-home and live-from-home trends aren’t going away in the first half of 2021, if not longer.
Expectations for a return to some form of normalcy aren’t expected until the second half of 2021 at the earliest, according to Schlossberg. Yet if the same theme that supported tech stocks in 2020 isn’t going away, investors shouldn’t bet on the Nasdaq index.
There are three reasons to support this stance.
First, the Nasdaq is trading at “a nosebleed” level of nearly 40 times trailing earnings, he wrote. While this is “by far” the biggest risk to tech stocks, a second headwind presented itself very recently.
The tech index’s high valuation may have been justified in an environment where the 10-year Treasury was below 1% — as has been the case for most of 2020. However, the bond market dynamics are changing ahead of President-elect Joe Biden’s administration that will likely introduce a $2 trillion stimulus bill.
If yields on the 10-year rise by 50 basis points, it would imply a 50% rise in rates. By default, bonds will “become a better competitor to stocks,” he wrote.
Finally, investors might be in store for a surprise event if the U.S. government under the Biden administration takes action against one or more of the biggest tech stocks. Companies like Facebook, Inc. (NASDAQ: FB) and Alphabet Inc (NASDAQ: GOOG) are in the direct crosshairs of the U.S. Department of Justice and regulators could be waiting for new orders from the next administration.