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What Burst The Dot-Com Bubble, And Will It Happen Again In 2021?

Wayne Duggan
·2 min read

One of the biggest questions for investors going into 2021 is whether the markets are in another tech bubble similar to the dot-com bubble back in 2000.

On Tuesday, DataTrek Research co-founder Nicholas Colas said there are plenty of similarities between the tech sector in 1999 and the tech sector in 2020, but there is one key difference that could keep stock prices rising.

Colas pointed out that SPACs and EV stocks are behaving a lot like the speculative tech stocks of 1999. In addition, the Nasdaq is up 94% over the last two years, roughly in-line with its one-year gain of 86% in 1999.

The Federal Reserve’s Role: Colas said there is one key difference between 1999 and 2020 when it comes to the Federal Reserve.

The Fed recently reiterated its $120 billion in monthly asset purchases to provide liquidity to the market. Interest rates are at zero, and the latest Fed projections call for them to stay there through at least 2023.

Turn back the clock to 2000 and you get a completely different picture. By March 2000, interest rates had risen to 5.85%, roughly in-line with their previous cyclical peak in 1995.

“The tech sector began to roll over as soon as it became clear that the Fed was intent on taking short term interest rates to new cycle-high levels and cooling the booming US economy,” Colas said.

The Nasdaq peaked on March 10, 2000, but the Fed continued to raise interest rates another 0.5% from there before finally easing in late 2000.

Colas said the Fed’s more dovish approach to markets in 2021 doesn’t necessarily mean tech-heavy ETFs like the Invesco QQQ Trust Series 1 (NASDAQ: QQQ) and the Technology Select Sector SPDR Fund (NYSE: XLK) will outperform in 2021. It just may take a different catalyst to turn the tech tide this time around.

Benzinga’s Take: Identifying financial market bubbles is much more difficult than predicting just how inflated they will get and exactly when they will pop.

One of the best ways to protect your portfolio from potential fallout from a stock market bubble is by diversifying into different market sectors and asset classes and maintaining a comfortable level of cash in your account to take advantage of any potential buying opportunities that may emerge if the stock market goes south.

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