Stocks surge in crazy year for financial markets

Stocks soared in 2020. After plunging into a bear market – defined as a decline of at least 20% – a new bull market emerged, which reached new highs faster than ever. The S&P 500 climbed 16.3% to end the year on a record, while the Nasdaq Composite gained 44%, its best year since 2009. The Russell 2000 small-cap stock index nearly doubled from its March low.

The pandemic “has put the US economy and markets on the biggest roller coaster we’ve seen,” said Jim Paulsen, chief investment strategist at Leuthold Group. “It caused people to dump a lot more during the collapse – it caused them to chase assets on the way up.”

Here are five investment trends that exploded in 2020, defying the expectations of many market watchers. Whether these will continue may decide a lot of the investing world in 2021.

Momentum trade

Beneath the surface, many individual stocks have made even more astronomical gains than the larger market. More stocks have gained at least 400% to their annual highs in 2020 than in any year since 2002, according to a Dow Jones Market Data analysis of FactSet data, which examined companies with a market value of at least minus $ 100 million.

Among these are Tesla Inc.,

the electric car maker that climbed more than 700% and made its way into the S&P 500, Overstock.com Inc.,

NIO Inc.,

Interactive platoon Inc.

and biotechnology companies.

Many retail and institutional investors have turned to dynamic trading, or bought stocks of companies that rose sharply while throwing relative losers. About $ 21 billion was recently in exchange-traded funds to keep up with the momentum, according to FactSet data, the most in at least a decade.

“Rising stock prices show that some companies are winners, prompting more people to do the same,” said Tobias Hekster, Co-Director of Investments at True Partner Capital. “When the herds start to agree to certain talking points and this begins to be reflected in the assessment, it can become a self-fulfilling prophecy.

Of course, some investors say it’s more than just excitement, calling the current environment a bubble. Among these is David Einhorn, who highlighted the exuberance of the market for initial public offerings and soaring speculative betting volumes like options in a third quarter update for investors in his hedge fund Greenlight Capital.

“There are many anecdotes about toppy behavior. We’ll share one: We recently received a job application with the subject line ‘I’m young, but good at investing’ from a 13-year-old who claims to have quadrupled his money since February, ”M wrote. Einhorn in the update, which was viewed by the Wall Street Journal.

Boom options

Investors are not just looking to profit from the rising stock market. They amplify investments through options, contracts giving investors the right to buy or sell stocks later in time at specific prices. The stock option market, which has suffered from years of stagnant volumes, has erupted in favor of crowded investors. The industry, often seen as the domain of sophisticated derivatives experts, has become a playground for young and old, amateur and skilled investors.

Option volumes surged to the highest level on record, according to data from Options Clearing Corp. dating back to 1973, with around 30 million contracts per day changing hands, up from around 19 million in 2019. Investors seemed to bet on up-and-down moves in stocks and indices, which often cash positions within hours or more. a few days to pocket profits.

Investors have often turned to options this year to bet on wild moves in the stock market, both up and down. Contracts allow investors to deposit a relatively small amount to bet on the direction of the stock market. Of course, losses can add up if an investor’s intuition is wrong, and riskier games can drive an even bigger hole in an investor’s portfolio.

In a sign of optimism permeating the markets, bullish call options – those that give investors the right to buy stocks later in time – flourished, as investors sought to profit from the rise in stocks. .

Bets on growth stocks like Tesla and Apple Inc.

were among the most popular in the entire market. At times, investors have said that the strong derivatives activity has caused big swings in the stock market itself, a sign of its growing influence on stocks. For some, activity is a sign that investors are more comfortable taking risks than they were in the past, especially with bond yields falling more and more.

“All this is motivated by this Federal Reserve, at zero interest, [quantitative easing] a world where people are forced to stretch and contort their market positioning to the extreme, ”said Cem Karsan, senior managing partner of volatility hedge fund Aegea Capital Management. “It’s a market built on…. very high leverage. “

SPAC

Few investments have benefited as much as special purpose acquisition companies, front companies designed to raise funds first and identify companies to acquire later.

More than 200 PSPCs entered the market in 2020, raising around $ 74 billion, more than five times the amount in 2019 and a record high, according to S&P Global data as of December 17.

“Investors are firmly focused on growth and the SPAC sponsors who target purchases in growth sectors have been successful in raising capital,” Goldman Sachs Group Inc.

analysts wrote to clients in December, saying that 2020 “will undoubtedly be known as the year of PSPC.”

The firm attributed increased activity to intensive individual investor transactions as well as low interest rates that made PSPCs more attractive.

In the past decade, about half of PSPC’s acquisitions have been in industrial, financial and energy sectors and just a third in information technology and healthcare, according to Goldman. In 2020, almost 70% were in tech, consumer discretionary and healthcare, lining up to be the biggest winners.

Many say they expect the trend to continue after many successes. DraftKings Inc.

and Nikola Corp.

, for example, jumped 335% and 48%, respectively, in 2020 after being made public through PSPCs.

Growth companies

As stocks like Tesla and Apple hit record highs and option volumes swelled, the divergence between companies promising strong growth going forward and other market segments deepened more than ever. Stocks of companies considered good deals in the market, value stocks, have declined, and the gap between the haves and have-nots in the market has never been wider.

The Russell 1000 Growth Index outperformed its value counterpart by the largest margin on record, according to Dow Jones Market Data. And while the market as a whole is flying high, traditional value groups like the S&P 500’s energy sector have fallen by more than 35% and the financials group has fallen 4.1%.

Bitcoin

The zeal for risky investments was perhaps nowhere more evident than in cryptocurrencies, where bitcoin prices hit the first high in nearly three years, breaking the $ 20,000 mark.

The push was driven by individual and institutional investors, many of whom entered the market for the first time. Bitcoin continued to rise until December to close the year at $ 28,966.18.

Write to Gunjan Banerji at [email protected]