Financial Literacy

Will 2021 Bring a Repeat of the Dot-Com Bubble?

“Two thousand zero zero, party over
Oops, out of time
So tonight I’m gonna party like it’s 1999.”

– Prince

I recently remarked to a colleague that this market feels like 1999’s to me.

Back then, tech stocks could do no wrong. They went up seemingly every day. Everybody talked about the market.

Doctors and lawyers were more interested in stocks than in their practices, some even quitting to become day traders.

Last week, I spoke with someone whose son decided not to go to medical school this fall because he was making so much money trading stocks – mostly Tesla (Nasdaq: TSLA).

Robinhood, the trading startup popular with younger traders for its app that has video game-like features, added 3 million accounts in the beginning of 2020. And in June, its customers traded more than customers of any other broker.

And, of course, there are the stocks – Tesla, Amazon (Nasdaq: AMZN), Facebook (Nasdaq: FB) and others – that have been going gangbusters.

Tesla’s valuation is more than the valuations of Ford (NYSE: F), General Motors (NYSE: GM), Honda (NYSE: HMC), Toyota (NYSE: TM), Nissan (OTC: NSANY) and Mercedes combined.

If you know my work at all, you know I’m a big believer in the power of dividends to grow your income and wealth.

I literally wrote the book on dividends – Get Rich with Dividends, which was an international bestseller and won the Book of the Year Award from the Institute for Financial Literacy.

But this year, dividend growth – my preferred dividend strategy – has underperformed. As of September 2, year to date, the Dividend Aristocrats lost 1.2% while the S&P 500 gained 9.7%.

(Dividend Aristocrats are members of the S&P 500 that have raised their dividends every year for 25 years or more.)

The last time these stocks (which historically outperform the market by 2% a year) underperformed so badly was in – you guessed it – 1999.

That makes sense. In 1999, the internet bubble was nearly at its peak. Who wanted to own shares of Exxon Mobil (NYSE: XOM) when you could buy shares of Ariba or Global Crossing, which were going up dozens of points a day?

If you’re a dividend investor, you’re likely a long-term investor. In that case, you have nothing to worry about. I suspect dividend growth will continue to outperform the market over the long term.

If you’re an active trader, get it while the gettin’s good. Tech stocks are on fire, and third quarter earnings are likely to be big catalysts. And perhaps the biggest movers will come from the biotech sector.

These stocks tend to jump more than any others. Last week, Aimmune Therapeutics (Nasdaq: AIMT) skyrocketed 171% in one day. On their best days, Tesla and Facebook never came close to that number.

Healthcare stocks tend to outperform the broad market in the last quarter of the year, and a lot of attention turned to biotech recently – for obvious reasons and nonobvious ones.

Any company working on a vaccine or therapy for COVID-19 has an opportunity to not only help society but also make a lot of money for itself and investors.

But there is plenty of important non-COVID-19 work being done in the space. Clinical trials on heart disease, Alzheimer’s, cystic fibrosis, rare genetic diseases and many other conditions are being conducted and will have data readouts in the coming months.

Strong clinical trial data often shoots biotech stocks higher

I expect biotech stocks to be the leaders in the fourth quarter.

So traders should consider biotechs for the rest of the year (and probably longer), stick to their discipline and take advantage of this rich trading environment.

We don’t yet know whether 2021 will emulate 2000. In the meantime, trade like it’s 1999.

Good investing,

Marc


About

A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.

 

Articles by
Related Articles