After a rip-roaring second quarter in which my technology stocks (as measured by the return on the NASDAQ 100) climbed +30% despite the pandemic, it would make sense that the market would cool off and maybe even give back some of its gains. I am a contrarian, but I am also betting on this outcome for the second half of 2020. That is, I expect that stocks will trade in a range albeit one that is wider than normal given the continued uncertainty around COVID. I think that we must wait at least until September for the market’s next “tell.” Although COVID cases still are uncomfortably rising in the U.S., and at a quicker pace in some states, investors likely will give the economy and the markets a “free pass” until we see how we fare in the fall as our students return to school and businesses more aggressively reopen. Of course, we also are tracking how close we are to approving a vaccine and then mass distributing it. Again, a medical solution that meets both criteria appears to be unrealistic before the end of 2020 much less by autumn.
Bottom line: With a new portfolio, today I would only invest a portion, maybe half, of its equity allocation. I am confident that the underinvested will not miss much of a positive catalyst for the rest of this summer. Where I am most likely to be wrong, however, is in underestimating the risk that COVID cases do not skyrocket in the interim, so tell our knucklehead nephew to stay out of crowded bars and wear a mask outside of the home.
I also am confident in the continued resilience of the technology sector. Since I managed $8 billion for Merrill Lynch Investment Managers in technology stocks during the Internet Bubble, and, of course, was there when it popped, I am often asked if we are at the cusp of similar carnage since technology stocks have done absolutely and relatively well for so long before and during COVID. As a portfolio manager, I sweat these details. Yes, I am a bit worried about technology stock valuations versus the sector’s norms and compared to the rest of the market. However, we are still far from Internet Bubble nonsense valuations. Here is evidence from Gurufocus.com: