A double bubble? The stock rally will continue ... near term

2020 was one of Wall Street’s wildest years on record. Following an early-year collapse, everything came back roaring to close the year at record highs. Stocks in the S&P 500 index rose 16%, while the tech-heavy Nasdaq gained a remarkable 44%. Even the Dow didn't miss out and it began the first trading session of 2021 at a record. But it wasn’t just stocks. All assets hit stratospheric levels. Gold (+24.6%) and silver (+47.6%) had their best years since 2010. And Bitcoin gained more than 300% in 2020.

The b-word

Throughout the year, we kept hearing about a bubble that would soon pop. It sure looks like a bubble, smells like a bubble, and exhibits price-to-earning ratios like a bubble, but it doesn't look like it will pop anytime soon. So were the bubble calls just wrong? Or are we in a new era of wild speculation driven by cheap money that must inevitably come to an end?

I lean towards the latter. So am I going to sell now? Absolutely not. The stunning performance of so many "bubble" stocks this past year shows that even if they eventually turn out to be frothy, there is plenty to miss out on before the bubble bursts.  And I don't think that it will in the first half of 2021. Just as the eye-popping rise during a global pandemic highlighted confidence that central banks and governments would prop up the world economy, I expect the delivery of vaccines to buoy markets in the near term.

There are going to be some speed bumps in the first half of 2021, including a recent surge in coronavirus cases and Georgia runoff races this week, but I still expect ultra-low interest rates to continue pushing investors to reach for higher-yielding assets (i.e. stocks and other assets such as bitcoin, Gold etc.). In fact, with many tech stocks at records, some investors are buying shares of companies in industries most affected by the pandemic (e.g. travel) and in emerging markets, all of which remain below their peaks. This highlights optimism that the economy will boom in the second half of 2021, even if the next few months offer hurdles to the recovery.

I'll continue to bet on tech and EV stocks* near term. These stocks always have a good story to tell about new technology and major shifts in consumption, and they will continue to be helped by the super-low bond yields engineered by central banks. Do I believe  that their valuations and the scale of the price moves are extreme and probably unsustainable in the long term? Absolutely, but I will not get out now. The danger for those of us calling out frothy markets isn’t only that high prices could be justified by fast-growing profits, but that bubbles can always become more extreme. If you doubt that, just look at 2020.

* I'm invested in Apple, Amazon, Facebook, Microsoft, Tesla, Quantumscape and Nio

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.