I can see why investors might be a bit nervous about the stock market and index funds like SPDR S&P 500 Trust ETF (NYSEARCA:SPY). After all, 2020 was a big year for the market. SPY stock gained 16% despite a raft of bad news.
Obviously, there was the novel coronavirus pandemic. That in turn led to significant economic contraction that lingered throughout the year. November saw contentious elections in the U.S., including a presidential race that as I write this still is being litigated.
The fact that SPY stock rallied 16% â€” and indices like the NASDAQ Composite did far better â€” to some investors is a sign of trouble. There seems to be a logical disconnect between the performance of the economy and the performance of the stock market. That in turn suggests that investors are too optimistic â€” or, in some tellings, simply delusional.
Thatâ€™s not the right way to look at it, however. Stocks, after all, arenâ€™t valued just on near-term profits. Certainly, 2020 was a difficult year for many people, but that doesnâ€™t mean the stock market and SPY stock should have declined. The point is what comes next. And what comes next still looks like good news.
Take the Long View With SPY Stock
On Mar. 20, I wrote the following:
â€¦ We will get through this time. And the innovations that were driving investor excitement just two months ago still are on the way. The technologies that are going to transform and improve this world will come.
It wasnâ€™t easy to write that then. The pandemic was taking over the world. Markets were plunging: SPY stock fell 4.9% that day. Incredibly, it was the indexâ€™s sixth single-day decline of at least that much in just ten trading sessions.
I donâ€™t bring that quote up to pat myself on the back. Admittedly, I was writing about a different index fund. But the broad point held: investors needed to take the long view, even when the near-term outlook seemed awfully bleak.
That broad point still holds. Investors need to take the long view. In fact, thatâ€™s exactly what most have done since March. We saw a few â€œpandemic playsâ€ rally in those dark days, but soon the marketâ€™s attention turned to those companies that would benefit from the long-term effects of Covid-19, not just those set to profit from the battle against the disease itself.
During brighter days, that long view still will pay off. The same megatrends on which I argued investors should focus last year still exist. Technological change is going to disrupt multiple industries and create dozens of potential winners.
And while investors generally think of tech stocks as those winners, itâ€™s not just tech that will win. More mature companies will benefit from utilizing the technological advancements provided by newer, more cutting-edge providers.
Meanwhile, the economy is recovering, and weâ€™re going to see a lot of pent-up demand in 2021 and 2022. From a long-term perspective, there already was reason for optimism, and now the short-term outlook is getting better as well.
Is This a Bubble?
Now, there will be investors who believe with this broad argument, but still believe that even good news is â€œpriced in.â€
Iâ€™m not one of those investors. Markets arenâ€™t cheap by historical standards, itâ€™s true. But there are a couple of factors to consider.
Most notably, markets look expensive relative to current profits. So does SPY stock. But those profits are depressed. Many (though certainly not all) companies saw their revenue take a hit in 2020. Some of those will face lingering impacts in 2021 as well.
In addition, spending rose this year. Shifting millions of workers from in-office to work-from-home positions added significant expense. Some level of normalcy will return, and companies already are figuring out how to cut waste and restore profit margins.
Secondly, interest rates elsewhere are zero, or close. To some investors, thatâ€™s a sign that the Federal Reserve has created a bubble. That strikes me as far too pessimistic a reading.
But low interest rates do make equities more attractive on a relative basis. Thatâ€™s even more true for quality companies with the potential for consistent long-term earnings growth. The S&P 500, and thus SPY stock, has no shortage of those names.
Certainly, investors donâ€™t need to fly into the market at this point, or use margin debt. We saw a decent-sized sell-off on the first day of 2021 trading, and it wouldnâ€™t be stunning to see another dip.
Iâ€™d buy those dips. 2020 was a surprisingly good year for the stock market, and I believe 2021 will be as well.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.