Double-Digit Returns for the Nasdaq in 2021?

By admin_45 in Blog

With the Nasdaq Composite up hefty double digits year-to-date (+41.1 percent) after a double-digit total return of +35.2 pct last year, what are the odds it can return another +10 percentage points in 2021? This is not as simple of a question as one may assume at first blush. Markets discount the future with pretty brutal efficiency, so a 3-peat of +10 percent returns is rather uncommon as it is very difficult to surprise markets three years in a row.

Take the S&P 500 as an example, which has rarely registered a third consecutive year of double-digit returns. Out of the 19 times the S&P has had two straight years of double-digit returns since 1958 (first full year of data), the index only went on to produce a positive double-digit return for a third straight year or more during three periods (1963-1965, 1995-1999, and 2012-2014). The upshot: a third consecutive year of double-digit returns doesn’t happen often. It’s much more common to see two straight years of double-digit returns sporadically sprinkled throughout a cycle.

Since our 2021 Look Ahead Survey showed the DataTrek community is most bullish on the technology sector, we used the Nasdaq Composite as a proxy to do the same analysis given its long history. Here’s what it shows:

• The Nasdaq Composite has posted two consecutive years or more of annual double-digit price returns 14 times since 1972 (first full year of comparable data). This year will bring that tally up to 15.
• In the year after those 14 instances, the Nasdaq was positive just over half the time (57 pct) and up an average of 10.4 pct on a price basis. Bear in mind that average was heavily skewed higher by the 1990s experience. For example, the best return was +85.6 pct in 1999; the worst was -39.3 pct in 2000.
• The Nasdaq went on to produce a positive double-digit return for a third year in a row during 4 periods:
  
  1978-1980: 1978 (+12.3 pct), 1979 (+28.1 pct), 1980 (+33.9 pct)
  1991-1993: 1991 (+56.9 pct), 1992 (+15.5 pct), 1993 (+14.7 pct)
  1995-1999: 1995 (+39.9 pct), 1996 (+22.7 pct), 1997 (+21.6 pct), 1998 (+39.6 pct) and 1999 (+85.6 pct)
  2012-2014: 2012 (+15.9 pct), 2013 (+38.3 pct), 2014 (+13.4 pct)

Here are our three main takeaways from the data:

#1: Similar to the S&P 500, a third year of double-digit returns for the NASDAQ Comp is not especially common. It usually comes amid easing financial conditions and improving earnings, such as during the bull run of the 1990s or after the Financial Crisis. Double-digit annual returns have, however, grown more common over time along with longer economic cycles.

#2: The Nasdaq has experienced a greater number of periods with +3 straight years of positive double-digit returns than the S&P 500 because it has more exposure to tech which is highly levered to innovation. While sometimes less predictable, tech companies tend to have a higher beta, more possibility for earnings surprises, and build strong competitive moats when their products/services hit critical mass. Additionally, the Nasdaq has a more dynamic indexing process because it includes unprofitable companies unlike the S&P 500. This sweeps up disruptive companies into the index earlier so they do not endure the same lag time that it takes to be included in the S&P.

#3: Part of the reason the Nasdaq rallied so strongly last year stems from the large selloff in Q4 2018 and Fed Chair Powell’s pivot to lower rates thereafter, and is up even more in 2020 from an accommodative central bank and meaningful fiscal stimulus. Replicating these tailwinds for another double-digit performance next year will be tougher, but not impossible given the severity of the latest recession. The Fed already signaled today that it will keep rates near zero for the foreseeable future, helping support equity valuations.

Bottom line: next year’s performance will largely stem from how the market discounts 2022’s economic growth and US corporate earnings, but another +10 percent return for the Nasdaq won’t come easily as the market tends not to underestimate results 3 years in a row.