• 2020 was a banner year for the leading technology companies

• Three reasons why 2021 could be problematic

• Two potential winners from the election

   

• COVID-19 was a watershed event for technology- A new era of regulation could cause a shift in the market’s sentiment

Elections have consequences. After Andrew Jackson won the 1828 Presidential election, New York Senator William L. Marcy said, “to the victor belongs the spoils.” Last week, the US went to the polls in one of the most contentious presidential contests in history. Passions ran higher on both sides of the political spectrum. The record turnout came as the US continues to face the worst pandemic since the 1918 Spanish flu.

This year markets experienced wild price volatility. In March and April, risk-off conditions sent markets reeling to the downside. Almost every asset posted significant losses compared to levels in February. Meanwhile, central bank liquidity and government stimulus programs ignited an explosive recovery that took many stocks to new highs for the year, and in some cases, new record levels.

The most glaring example came in the technology sector. In many ways, the pandemic that caused lockdowns and social distancing was highly bullish for the tech stocks. Technology allowed people to remain in contact with voice and visual communication. It made shopping from home quick and easy. As retail stores closed their doors during the height of the pandemic, the online markets thrived. With more time on their hands, many increased times spent playing online video games and streaming entertainment. Social media platforms saw usage grow, and during the Presidential election, they became an even more powerful means of exchanging views than in the past. Shares in the technology sector experienced explosive gains.

Over the weekend, Joe Biden declared victory. The thin margin will remain under litigation. The Democrats won a majority in the House, but Republican gains ate into their seat advantage. The Senate remained a toss-up with a marginal Republican edge. The issue will settle in early January with a pair of runoff races in Georgia.

As we move past the election, we could see the spotlight on technology intensify in the halls of power in Washington DC. While Democrats and Republicans agreed on virtually nothing during the Trump administration, there has been underlying bipartisan support for addressing the leading technology companies’ growing influence.

2020 was a banner year for the leading technology companies

The road was bumpy, but 2020 has been an incredible year for the technology-heavy NASDAQ Composite Index.

Source: Barchart

As the chart shows, after an extreme speed bump in March, the index was at the 11,895 level on Friday, November 6, over 32.5% higher from the end of 2019. The FAANG stocks, including Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google/Alphabet (GOOG), had a combined market cap of over $5.9 trillion.

The Invesco QQQ Trust ETF (QQQ), which holds all of the FAANG stocks and other high-flyers, including Tesla (TSLA), did even better than the NASDAQ composite.

Source: Barchart

As the chart shows, the QQQ moved from $212.61 at the end of last year to $294.61 at the end of last week, a rise of over 38.5%.

Three reasons why 2021 could be problematic

Three issues are likely to face the technology sector net year if the share prices remain around current levels or move higher by the end of 2020. The first is simple but often a powerful force in markets. More often than not, the best performing sector during one period tends to be the worst in the next. The spectacular gains could run into a gravitational pull. The second is that corporate and individual tax rates are likely to rise, which will weigh on all company’s earnings, and technology is no exception.

There is overwhelming support for increasing tax rates on billionaires and forcing companies to pay higher tax rates with far fewer deductions. The change in government almost guarantees that taxes are going higher for the tech sector. Finally, and most significantly, the dominant position of the handful of companies that have a nearly $6 trillion valuation puts them in a challenging position. Regulators in the US and Europe are likely to address the leading companies’ sheer size, which results in dominance and competition issues. Some of the founders and CEOs have become US oligarchs, which will lead to changes in the regulatory environment.

Two potential winners from the election

While the global pandemic was mostly bullish for the business of many technology stocks, Uber Technologies (UBER) and Lyft Inc (LYFT) saw business evaporate as people stayed at home. The need for their services declined dramatically as travel for business and pleasure significantly declined.

On Election Day, California voters passed Proposition 22, which establishes a new employment class for gig-economy drivers. UBER and LYFT spent almost $200 million to convince voters to pass the referendum. California planned to force the companies to pay drivers a “fair wage with benefits.” The new employment class was a massive victory for the companies and will likely lead to referendums in other states.

UBER shares have rallied with the rest of the stock market in 2020.

Source: Barchart

As the chart illustrates, UBER shares closed 2019 at $29.74 and were trading at $44.87 on Friday, November 6, a rise of just over 50%. The shares rallied by over $10 from the closing price on November 2, the day before the election, when they settled at $34.81.

Source: Barchart

LYFT shares have trailed UBER as they closed 2019 at $43.02 and were trading at just below the $30 level on November 6, a loss of over 30%. However, LYFT moved from $24.50 on November 2 to over the $29.84 level in the aftermath of the election that passed Proposition 22 in California.

UBER and LYFT continue to face significant risks during the second wave of the coronavirus. However, both companies removed a substantial hurdle to their future success on Election Day.

COVID-19 was a watershed event for technology- A new era of regulation could cause a shift in the market’s sentiment

The global pandemic that continues to weigh on the worldwide economy lit a bullish fuse for technology companies, pushing the valuations and cash hordes of the leaders to unprecedented levels. Founders like Jeff Bezos, Mark Zuckerberg, Elon Musk, and others have seen their incredible fortunes rise exponentially with their companies’ share prices.

The technology sector faces a wave of taxation and regulation in 2021. Progressive Democrats are likely to push for addressing wealth disparities. Moderate Democrats pledged to raise taxes and tighten rules. Many Republicans will go along with their colleagues from the other side of the political aisle. They have expressed concerns that the leading technology companies have too much influence and control of sensitive and valuable data.

In the eventual aftermath of the global pandemic, we could see a period where the technology sector corrects on the back of a higher tax bill and more controls on their businesses that detract from earnings.

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UBER shares were trading at $48.16 per share on Tuesday morning, down $0.02 (-0.04%). Year-to-date, UBER has gained 61.94%, versus a 11.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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