Rising stocks in a crazy year for financial markets

Shares soared in 2020. After plunging into a bearish market, defined as a drop of at least 20%, a new bullish market emerged, advancing to highs faster than ever. The S&P 500 rose 16.3% to end the year with a record, while the Nasdaq Composite gained 44%, its best year since 2009. The Russell 2000 small capitalization index has doubled approximately with respect to its March minimum.

The pandemic “placed the U.S. economy and markets on the biggest roller coaster we’ve seen,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “It caused people to dump a lot more when it collapsed; it caused them to chase assets on the rise.”

Here are five investment trends that grew in 2020, challenging the expectations of many market watchers. If these continue you can decide a lot about the investment world in 2021.

Impulse trade

Below the surface, many individual stocks recorded even more astronomical gains than the market as a whole. According to an analysis of Dow Jones Market Data by FactSet, which analyzed companies with a market value of at least US $ 100 million, at least 400% gained more shares at least 400% at their highest annual in 2020 than in any year since 2002.

Among these is Tesla Inc.,

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

NIO Inc.,

Peloton Interactive Inc.

and biotechnology companies.

Many retail and institutional investors turned to boosted trading or buying shares of companies that have risen sharply as they dumped relative losers. Recently, some $ 21 billion was earmarked to boost the tracking of publicly traded funds, according to FactSet data, the highest in at least a decade.

“Higher stock prices show that certain companies are winners, which attracts more people to do the same,” said Tobias Hekster, co-investment director at True Partner Capital. “When herds begin to agree on certain points of discussion 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 excitement, calling the current environment a bubble. Among them is David Einhorn, who noted the exuberance in the market for initial public offerings and high volumes in speculative bets as options in a third-quarter update for investors of its Greenlight Capital hedge fund.

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

Boom options

Investors are not just looking to benefit from the rise of the stock market. Investments increase through options, contracts that give investors the right to buy or sell shares later at specific prices. The stock options market, which suffered from years of strong volumes, came to life as investors rallied. The sector, which was often believed to be the domain of sophisticated derivatives experts, became a playground for young and old, amateur and skilled investors.

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

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

In a sign of the optimism that permeates the markets, bullish buying options — those that give investors the right to buy shares later — thrived, as investors sought to benefit from the rise in stocks.

Bets on growth stocks like Tesla and Apple Inc.

they have been among the most popular in the entire market. Investors sometimes said that strong derivatives activity drove large movements in the stock market, a sign of its growing influence in stocks. For some, the activity is a sign that investors are more comfortable taking risks than in the past, especially with ever-lower bond yields.

“All of this is driven by this Federal Reserve, a zero interest rate, [quantitative easing] a world where people are forced to stretch and contort their market position 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 “.

SPAC

Few investments benefited as much as special-purpose acquisition companies, shell companies designed to raise money first, and need companies to acquire them later.

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

“Investors are firmly in a growth mindset and SPAC sponsors targeting purchases in growing industries have been successful in raising capital,” Goldman Sachs Group said. Inc.

analysts wrote to clients in December saying that 2020 “will certainly be known as the year of the SPAC.”

The firm attributed an increase in activity to the strong trading of individual investors, as well as low interest rates that increased the attractiveness of SPACs.

Over the past decade, about half of the acquisitions between SPACs were made in the industrial, financial and energy sectors and about a third were in information technology and healthcare, according to Goldman. In 2020, almost 70% belonged to the technology, discretionary and consumer health sectors, aligning with the largest stock winners.

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

and Nikola Corp.

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

Growth companies

As stocks such as Tesla and Apple peaked and option volumes increased, the divergence between companies promising high growth in the future and other corners of the market grew more than ever. The shares of companies considered bargains in the market, the shares of value, fell and the gap between those who have and those who do not have the market has never been so great.

According to Dow Jones market data, the Russell 1000 growth index outperformed its value counterpart by the largest margin recorded. And while the broader market is climbing, traditional value groups like the S&P 500 energy sector fell more than 35% and the financial group fell 4.1%.

Bitcoin

Perhaps nowhere was the desire for risky investments as evident as it was in cryptocurrencies, where bitcoin prices rose to the first record in nearly three years, surpassing $ 20,000.

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

Write to Gunjan Banerji to [email protected]