Stocks rise in crazy year for financial markets

Stocks soared in 2020. After plunging into a bear market – defined as a drop of at least 20% – a new bull market has emerged, reaching new highs faster than ever. The S&P 500 rose 16.3% to end the year at a record high, while the Nasdaq Composite gained 44%, its best year since 2009. The Russell 2000 small cap index has almost doubled since the March low.

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

Here are five investment trends that exploded in 2020, defying the expectations of many market watchers. If that continues, it can decide a lot about the investment world in 2021.

The Momentum Trade

Underneath the surface, many individual stocks recorded gains even more astronomical than the broader market. More stocks gained at least 400% at their annual peaks in 2020 than in any year since 2002, according to an analysis by Dow Jones Market Data of FactSet data, which looked at companies with a market value of at least $ 100 millions.

Among them are Tesla Inc.,

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

NIO Inc.,

Peloton Interactive Inc.

and biotechnology companies.

Many retail and institutional investors have turned to momentum trading, or buying shares in companies that have risen dramatically, while getting rid of relative losers. About $ 21 billion was recently deposited in exchange-traded funds tracking the momentum, according to FactSet data, the highest in at least a decade.

“Higher stock prices show that certain companies are winning, attracting more people to do the same thing,” said Tobias Hekster, co-director of investments at True Partner Capital. “When the flocks start to agree on certain points of discussion and this starts to be reflected in the assessment, it can become a self-fulfilling prophecy.”

Of course, some investors say it is more than just excitement to call the current environment a bubble. Among them is David Einhorn, who pointed to exuberance in the IPO market and rising volumes on speculative bets as options in a third-quarter update for investors in his hedge fund Greenlight Capital.

“There are many anecdotes about toppy’s behavior. Let’s share one: We recently received an employment form with the subject of the email, ‘I’m young, but good at investing’ from a 13-year-old boy who claims to have quadrupled his money since February, ”wrote Einhorn in the update, which was seen by The Wall Street Journal.

Boom Options

Investors are not just looking to profit from the rise in the stock market. They are expanding investments through options, contracts that give investors the right to buy or sell shares later at specific prices. The stock options market, which has suffered years of stagnant volumes, has come to life as investors have accumulated. The sector, often considered the domain of sophisticated derivatives specialists, has become a playground for young and old, amateur and qualified investors.

Option volumes jumped to the highest level on record, according to data from Options Clearing Corp. dating back to 1973, with around 30 million contracts a day changing hands, compared to around 19 million in 2019. Investors expected to bet on up and down movements in stocks and indices, often withdrawing positions within hours or days to pocket profits.

Investors have often resorted to options this year to bet on wild stock market movements – both up and down. The contracts allow investors to place a relatively small amount to bet on the direction of the stock market. Of course, losses can increase if an investor’s guess is wrong, and more risky moves can burn an even bigger hole in an investor’s portfolio.

In a sign of the optimism that permeates the markets, optimistic purchase options – those that give investors the right to buy shares later – flourished as investors sought to profit from the rise in stocks.

Growth stock bets like Tesla and Apple Inc.

are among the most popular in the entire market. Investors have sometimes said that strong derivatives activity has spurred large movements in the stock market itself, a sign of its growing influence on stocks. For some, the activity is a sign that investors are more comfortable taking risks than in the past, especially with bond yields falling further and further.

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

SPACs

Few investments have benefited as much as special-purpose acquisition companies, front companies designed to raise money first and locate businesses to acquire later.

More than 200 SPACs hit the market in 2020, raising about $ 74 billion, more than five times the amount in 2019 and a record high, according to data from S&P Global on December 17.

“Investors are firm in a growth mindset and SPAC sponsors aiming to buy in growing industries have been successful in raising capital,” Goldman Sachs Group Inc.

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

The company attributed the increased activity to heavy trade by individual investors, as well as low interest rates that increased the fascination of SPACs.

In the past decade, about half of the acquisitions among SPACs have been in the industrial, financial and energy sectors, and only about a third have been in information technology and healthcare, according to Goldman. In 2020, almost 70% were in the technology, discretionary consumption and health sectors, aligning themselves with the biggest winners in stocks.

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

and Nikola Corp.

, for example, increased 335% and 48%, respectively, in 2020 after going public through SPACs.

Growing companies

As stocks like Tesla and Apple rose and options grew, the divergence between companies that promised high growth in the future and other corners of the market became more pronounced than ever. Shares of companies seen as bargains in the market, value stocks have failed, and the gap between who has and who does not have in the market has never been greater.

The Russell 1000 growth index outperformed its counterpart in value by the highest margin ever recorded, according to Dow Jones Market Data. And while the broader market is flying high, traditional value groups like the S&P 500 energy sector have declined by more than 35% and the finance group has fallen 4.1%.

Bitcoin

Perhaps nowhere has the zeal for risky investments been more evident than in cryptocurrencies, where bitcoin prices have reached their first record in almost three years, exceeding the $ 20,000 mark.

The increase was driven by individual and institutional investors, many of them entering the market for the first time. Bitcoin continued to rise until December, closing the year at $ 28,966.18.

Write to Gunjan Banerji at [email protected]