Hasta La Vista, 2020. Hello, 2025.

By any measure, 2020 proved to be a year that we all would like to forget.  To say the least, everything seemed a bit off-kilter last year. Our health, economic, and social wellbeing came under threat in ways most of us have never experienced before.  Not much to cheer about in 2020, that is unless you are a stock market investor.  Confoundingly, the S&P 500 posted a gain of 16% for the year, a result that was achieved despite a dreadful March panic which knocked about 25% off the market averages.

How do we account for this run-up during such depressing times?  Most observers attribute it to excessive speculation fueled by abundant fiscal and monetary stimulus.  In other words, the U.S. Congress and the Federal Reserve, in their efforts to support the unemployed and the economy in general, have pumped so much liquidity into the system that a lot of money has inevitably wound up in the stock market.  The main target of speculation was the information technology (IT) sector, which was up 44% for the year.

Is the exuberance irrational?  It kind of feels like a replay of the dot.com bubble of the late 1990s.  But this time it might be a little different due to what analysts are calling the tech-celeration.  Because the pandemic has caused many of us to modify our accustomed routines, the adoption of tech-based practices has accelerated.  Examples are numerous: video conferencing, online shopping, distance learning, movie streaming, electronic banking, remote healthcare, etc.  All these things have existed for years, but the pandemic has caused wide-spread implementation of these technologies much earlier than had been predicted.  So, a technology we had thought would not be commonly adopted until 2025 or later is being used on a wide scale here and now in 2020.  That is not a totally irrational basis for speculation.

To be sure, the market is still probably a bit overvalued, but having some exposure to the IT and communications sectors is crucial since that is where the growth in our economy will be.

1 January 2021