March 9, 2021
Despite the ravages of the pandemic, 2020 turned out to be a good year for U.S. stocks. All the major indexes hit record highs, despite the fact that many major sectors suffered heavy losses, including energy, banks, airlines, real estate and hospitality.
In a normal year, those declines would have been enough to drag the indexes into the red. But 2020 was no normal year. The dazzling performance of the technology sector almost single-handedly turned what should have been a dismal year for the markets into a winner.
One number tells the story. The Nasdaq Composite Index gained 43.2 per cent last year. No one else was close. The S&P 500 finished up 16.26 per cent, the Dow Jones Industrial Average advanced 7.25 per cent and the S&P/TSX Composite gained a paltry 2.17 per cent.
Some analysts warned that the tech sector was overbought, but the surge continued into the early part of 2021. On Feb. 16, the Nasdaq hit a record high of 14,175.12 in intraday trading. Since then, despite a few short-term rallies including an uptick on Friday, the trend has been down. At the close on Monday, the index stood at 12,609.16, down 1,566 points or 11 per cent from the February high.
Investors are rightly asking what happens now. Are we about to see a repeat of the dot-com crash? It began on Monday, March 13, 2000, after Nasdaq had hit a new record the previous Friday. By the time it was over in 2002, the index had lost almost 80 per cent of its value. It took 15 years for Nasdaq to regain its 2000 high.
The major difference, of course, is that in 2000, most of the dot-com companies were startups with no earnings. It was a Wild West show as everybody was fighting to control a share of a new technological breakthrough known as the internet.
Today’s leading technology companies are well financed and hugely profitable.
But, many smaller companies are taking a pounding right now.
It is the newcomers whose prices ran way ahead of themselves that are leading the tech sector down. That’s the same story as in 2000. What we don’t know yet is whether the big players are going to be dragged down with them. So far, they’re faring much better, but will that hold?
One person who does not believe we’re heading into a new dot-com crash is Michael Clare, vice-president of Brompton Group.
“Tech still has a ton of running room,” he said during a recent webinar on the sector. “There is a lot of strong fundamental growth to come. This is much different from 2000-2002 on many levels, including profitability and cash flow.”
Although the pandemic accelerated the transition to technology by five to 10 years, he still sees strong potential in many areas. They include hyperconnectivity (5G, the internet of things), cloud computing, semiconductors and artificial intelligence, which he calls “a massive opportunity for investors.”
As the manager of a high-performance tech fund, it would be surprising if Mr. Clare were anything but bullish on the sector. But his arguments make sense. We’ve barely scratched the surface when it comes to investing in such tech subsectors as 5G, artificial intelligence and blockchain. As he puts it: “There’s tons of runway for growth opportunities.”
But it may take a while to get there. The market is socking investors who overpaid for stocks that offer breakthrough technology but minimal to negative earnings. We’re in the midst of a tech correction and it probably isn’t over. I don’t expect another dot-com crash, but I do expect more pain as the market finds a sustainable level.
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