The stock market is trying to get 2021 going, and after a strong 2020 performance from the Nasdaq Composite (^IXIC), bullish investors are hopeful that stocks will continue their winning ways. With the Dow having climbed above the 30,000 mark recently, some wonder whether a big milestone for the Nasdaq could follow closely on its footsteps.
To be clear, with the Nasdaq just above 12,800, many would see 15,000 as a healthy target for the index for 2021. However, give just how sharply so many Nasdaq stocks rose in 2020, it's not surprising to see more optimistic investors calling for the 20,000 mark as a stretch goal. Below, we'll look at just what it would take to get the Nasdaq above 20K.
Another big gain?
First, a little math: For the Nasdaq to hit 20,000, it would need to rise more than 7,100 points from its Dec. 31 close of 12,888. That works out to a 55% gain in 12 months.
With the stock market having generating long-term average annual returns closer to 10%, you have to be incredibly positive about the prospects for Nasdaq gains to think that 55% is possible. However, we have seen similar-sized gains recently. In 2020, the Nasdaq finished higher by 44%. Moreover, when you measure its gains from the March lows, the increase doubles to 88% by year-end 2020.
So a 55% gain isn't impossible. That leads to the follow-up question: What would have to happen to lift the Nasdaq that far?
A weighty issue
The Nasdaq Composite has thousands of stocks in it. But the index is weighted by market capitalization, and therefore, the biggest companies in the index have a huge influence on how the entire market performs.
In the case of the Nasdaq, three stocks -- Apple (AAPL 1.55%), Microsoft (MSFT 0.58%), and Amazon.com (AMZN 2.49%) -- represent more than 30% of the index. The next seven stocks add another 15%.
To lift the Nasdaq 44% in 2020, it took amazing performance from the top-tier tech stocks. Apple and Amazon were both up around 75% to 80%. Microsoft contributed a gain of over 40%.
In addition, second-tier players had to pull their weight. A 700% boost from Tesla (TSLA 4.58%) was certainly helpful, but the fact that already-established giants NVIDIA (NVDA 2.76%) and PayPal Holdings (PYPL 0.31%) each more than doubled played an even bigger role in lifting the Nasdaq.
Hope springs eternal
Although it's not beyond the realm of possibility that the Nasdaq could follow up a stellar 2020 with an even more stupendous 2021, long-term investors don't need to worry too much about whether Nasdaq 20,000 happens this year, next year, or several years down the road. The confluence of factors that played in the Nasdaq's favor in 2020 isn't likely to happen again anytime soon. Indeed, some think it's more likely that we'll see the index dip below 10,000 before it rises above 20,000.
Expecting amazingly strong performances from the stock market two years in a row is a lot to ask. As long as you're invested in the companies you believe in, though, the odds are in your favor that you'll get healthy returns from your portfolio and improve your chances of reaching all of your financial goals.