Shares are soaring in a crazy year for financial markets

Shares surged in 2020. After plunging into a bear market – defined as a drop of at least 20% – a new bull market emerged, one that was racing to 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 has roughly doubled from its March low.

The pandemic “put the US economy and markets on the biggest rollercoaster we’ve ever 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 way up.”

Here are five investment trends that boomed in 2020 and defied the expectations of many market viewers. Whether these continue can decide a lot about the investment world in 2021.

The momentum trade

Below the surface, many individual stocks posted even more astronomical gains than the broader market. According to a Dow Jones Market Data analysis of FactSet data, which looked at companies with a market value of at least $ 100 million, stocks gained more than 400% at their annual highs in 2020 than in any year since 2002.

Among them are Tesla Inc.,

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

NIO Inc.,

Platoon Interactive Inc.

and biotechnology companies.

Many private and institutional investors turned to momentum trading or bought stocks of companies that had risen sharply while ditching the relative losers. About $ 21 billion was recently in exchange-traded funds that followed the momentum, data from FactSet shows, the highest in at least a decade.

“Higher stock prices show that certain companies are winners, so more people do the same,” said Tobias Hekster, co-chief investment officer at True Partner Capital. “When herds agree on certain topics of conversation and that is reflected in the valuation, 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 them is David Einhorn, who pointed to exuberance in the IPO market and surging volumes in speculative bets such as options in a third quarter update for investors in his hedge fund Greenlight Capital.

“There are many anecdotes about top behavior. We will share one: we recently received an application with the email subject ‘I am young but good at investment’ from a 13 year old who claims to have quadrupled his money since February, ”Mr. Einhorn wrote in the update , which was viewed by The Wall Street Journal.

Options Tree

Investors don’t just want to take advantage of the rising stock market. They increase investments through options, contracts that give investors the right to buy or sell stocks at specific prices later in time. The stock options market, struggling with years of flat-lining volumes, came to life as investors piled up. The industry, often thought to be the preserve of advanced derivatives experts, became a playground for investors young and old, amateur and experienced investors.

Option volumes have risen to their highest level ever, according to data from Options Clearing Corp. dating back to 1973, with about 30 million contracts per day switching hands, up from about 19 million in 2019. Investors wanted to bet on up and down movements in stocks and indexes, often cashing in positions within hours or days to earn a profit. to make.

Investors have often chosen options this year to bet on the wild moves of the stock market – both up and down. The contracts allow investors to bet a relatively small amount of money to bet on the direction of the stock market. Of course, losses can add up if an investor’s suspicion is wrong, and riskier actions can burn an even bigger hole in an investor’s portfolio.

In a sign of the optimism pervading the markets, bullish call options – which give investors the right to buy stocks later in time – thrived as investors wanted to take advantage of the stock’s rally.

Betting on growth stocks such as Tesla and Apple Inc.

are among the most popular on the entire market. At times, investors said the heavy derivatives activity has caused large movements in the stock market itself, a sign of the growing influence on stocks. For some, the activity is a sign that investors are more comfortable taking risks than in the past, especially as bond yields continue to fall.

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

SPACs

Few investments have yielded so many benefits as special purpose acquisition companies, empty companies designed to raise money first, and designate companies to be acquired later.

In 2020, more than 200 SPACs hit the market, worth about $ 74 billion, more than a fivefold increase in 2019 and a record, according to data from S&P Global on Dec. 17.

“Investors are firm in a growth mindset and SPAC sponsors focusing on acquisitions in growth sectors have been successful in raising capital,” Goldman Sachs Group Inc.

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

The company attributed the increased activity to heavy trading from individual investors and low interest rates, adding to the appeal of SPACs.

According to Goldman, about half of the acquisitions under SPACs in the past decade were in the industrial, financial and energy sectors and about a third in information technology and healthcare. In 2020, nearly 70% belonged to the technology, consumer discretionary and healthcare sectors, in line with the biggest equity winners.

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

and Nikola Corp.

, for example, rose 335% and 48%, respectively, in 2020 after disclosure through SPACs.

Growth companies

As stocks like Tesla and Apple hit high marks and the number of options increased, the divergence between companies promising high growth in the future and other corners of the market became greater than ever. Shares of companies considered bargains in the market, value stocks, collide, 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 ever, according to Dow Jones Market Data. And while the broader market is soaring, traditional value groups like the S&P 500 energy sector fell by more than 35% and the financial group by 4.1%.

Bitcoin

Perhaps nowhere has the zeal for risky investments been more evident than in cryptocurrencies, where bitcoin prices soared to their first record in nearly three years, crossing the $ 20,000 mark.

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

Write to Gunjan Banerji at [email protected]