Stocks rise in crazy year for financial markets

Stocks skyrocketed in 2020. After a bear market plunged – defined as a decline of at least 20% – a new bull market emerged, rising faster than ever to new highs. The S&P 500 climbed 16.3% to close the year on a record high, while the Nasdaq Composite rose 44%, its best year since 2009. The Russell 2000 small-cap stock index has roughly doubled from its low point in March.

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

Here are five investment trends that were booming in 2020, defying the expectations of many market viewers. Whether it continues, many may decide on the investment world in 2021.

The Momentum Trade

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

This includes Tesla Inc.,

the manufacturer of electric cars that rose more than 700% and invaded the S&P 500, Overstock.com Inc.,

NIO Inc.,

Peloton Interactive Inc.

and biotechnology enterprises.

Many retail and institutional investors have focused on momentum trading, or buying shares of companies that have risen sharply while dumping the relative losers. About $ 21 billion has recently been invested in exchange-traded funds, showing the FactSet data, the most in at least a decade.

“Higher share prices show that certain companies are winners, and attract more people to do the same,” said Tobias Hekster, co-chief investment officer of True Partner Capital. “When flocks begin to agree with certain points of discussion and begin to reflect them in the valuation, it can become a self-fulfilling prophecy.”

Of course, some investors say that this is more than just excitement, which the current environment calls a bubble. Among them is David Einhorn, who pointed to exuberance in the market for initial public offerings and rising volumes in speculative betting, such as options, in a third-quarter update for investors in its hedge fund Greenlight Capital.

‘There are many anecdotes for awkward behavior. We will share one: We recently received an application with the e-mail subject ‘I am young but good with investments’ from a 13-year-old who claims to have quadrupled his money since February,’ said Mr. Einhorn in the update, which was viewed by The Wall Street Journal.

Options Tree

Investors do not just want to take advantage of the rising stock market. It increases investments through options, which gives contracts the right to buy or sell shares at specific prices later. The stock options market, which has been living under equal volumes for years, came alive when investors piled up. The sector, often regarded as the domain of sophisticated derivatives experts, has become a playground for investors young and old, amateur and skilled.

Option volumes jumped to the highest level of record, according to data from Options Clearing Corp dating back to 1973, with about 30 million contracts per day changing hands, compared to about 19 million in 2019. Investors wanted to bet on moving up and down In stocks and indices, which regularly pay out positions within hours or days to pocket profits.

Investors have often turned to options this year to bet on the wild movements of the stock market – up and down. The contracts allow investors to deposit a relatively small amount to bet in the direction of the stock market. Losses can, of course, add up if an investor’s mistakes are wrong, and riskier plays can burn a bigger hole in an investor’s portfolio.

In one sign of optimism pervading the markets, the bullish call options, which give investors the right to buy shares later, flourished because investors wanted to take advantage of the rise in stocks.

Betting on growth stocks like Tesla and Apple Inc.

was one of the most popular in the whole market. Sometimes investors have said that the heavily derivative activities are driving large movements in the stock market, a sign of its increasing impact on equities. For some, the activity is a sign that investors are more comfortable taking risks than in the past, especially as bond yields have fallen lower and lower.

“It is driven by this Federal Reserve, zero interest rate, [quantitative easing] world where people are forced to expand their position in the market to extremes, ”said Cem Karsan, a senior managing partner of volatility hedge fund Aegea Capital Management. ‘It’s a market built on … very high leverage. ”

SPACE

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

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

“Investors are strongly focused on growth, and SPAC sponsors focused on purchases in growth industries have been successful,” Goldman Sachs Group said. Inc.

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

The firm attributed to larger operations to heavy trading of individual investors, as well as low interest rates that enhanced the attractiveness of SPACs.

Over the past decade, about half of the acquisitions were among SPACs in the industrial, financial, and energy sectors, and according to Goldman, about a third were in information technology and healthcare. In 2020, almost 70% were in the technology, consumer discretionary and healthcare sectors, which is in line with the biggest share 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 through SPACs.

Growth companies

As stocks such as Tesla and Apple peaked and options volumes increased, the gap between companies promising high growth in the future and other corners of the market grew stronger than ever. Shares in companies that are considered bargains in the market, value inventory, have broken, and the gap between the market’s holdings and notes has never been so large.

The Russell 1000 Growth Index outperformed its largest margin, according to Dow Jones Market Data. And although the broader market is flying high, traditional value groups such as the S&P 500’s energy sector declined by more than 35% and the financial group fell by 4.1%.

Bitcoin

Perhaps the zeal for risky investments was nowhere near as clear as in cryptocurrencies, where bitcoin prices rose to the first record in almost three years, exceeding the $ 20,000 mark.

The boom was driven by individual and institutional investors, and many people 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 by [email protected]