US stocks are racing towards the third consecutive year of significant gains, with major indexes approaching record highs through the end of 2021.
Even with the recent disruptions from the coronavirus Omicron variant, the S&P 500 is heading for a 27% advance for 2021 and has reached 70 peaks. It is the third year in a row that the overall index has achieved double-digit gains, and the second in the midst of the COVID-19 pandemic. The Dow Jones Industrial Average and Nasdaq Composite are up 19% and 22%, respectively, this year, helping send the major indexes to their best three-year performance since 1999.
Some traders note that warning signs are looming: Inflation can turn corporate and customer finances upside down. Many companies that were once loved in the market lose money. Big-name stocks continue to post gigantic one-day swings. However, individual traders and institutional investors are hungry to take on greater risks and are willing to accept bouts of volatility.
The year got off to a mind-bending start: Day traders who rammed around the stocks early in the pandemic put money into meme stocks like GameStop Corp. , disrupting the power dynamic in which professional investors are usually the king of the market. Money managers say that this year they are tracking more closely than ever where individual investors park their money and monitor their business for evidence of market moves.
Cryptocurrencies have entered the mainstream, with the help of influencers including Elon Musk and the emergence of the first Bitcoin-traded fund. Cryptocurrency prices went up, then down, and then up again. The market for non-fungible tokens has exploded.
The companies first appeared in the general market with huge valuations. Corporate executives scrambled to cash in on a surging stock market, with companies from Norwegian Cruise Line Holdings Ltd.
AMC Entertainment Holdings Inc will issue more shares to raise cash.
Commerce spurred more into popular culture. Novice investors placed so-called YOLO (“You only live once”), or risky big stock bets, and shared snapshots of their gains and losses on social media.
“When you see your friends making a lot of money in the market, everyone jumps,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
However, the stock market’s rise was not at all calm. GameStop’s stock started ripping in January, driven insane on social media, and individual stocks have continued to swing throughout the year.
Even late in the year, stocks including the Avis Budget Group company
Gaining a digital world corp.
, a company associated with former President Donald Trump, has been posting giant one-day fluctuations.
Fireworks weren’t limited to meme stock. Market values of stocks within the S&P 500 have risen or tumbled at a rate approaching the panicked and volatile early days of the Covid-19 pandemic, according to Bank of America Corp analysts. Even some of the largest companies in the United States registered huge moves, gaining or in some cases losing tens of billions of dollars in market value in a matter of days. Includes Tesla company ,
which gained nearly $200 billion in market value in the span of four days in late December — more than the equivalent of Ford Motor company
and General Motors company
“We’ve never seen anything like this in history,” said Dean Cornott, chief executive of brokerage Macro Risk Advisors, referring to the volatility in some individual stocks. “The collisions were massive.”
Figures from Macro Risk Advisors show that stocks like GameStop, AMC, Tesla and Nvidia Corp were more volatile on days when stocks were up than they were when they were down, altering usual market dynamics.
“Who said it was an escalator, an elevator down for the arrows?” Mr. Curnutt wrote in a note to clients.
Some traders said the moves have drawn many investors, both institutional and individual, into options, a shift that could leave the market subject to greater volatility. Options trading activity, which gives traders the right to buy or sell shares at a specified price on a specified date, has reached its highest level in industry history in data going back to 1973.
By one measure, options trading, which can be riskier than stock trading, is on track to surpass full-year stock activity for the first time, according to Cboe Global Markets data as of Dec. The value of individual stock options traded exceeded $467 billion, compared to about $410 billion of equity. Theoretical value measures how much the underlying stock option contracts are worth. The number fluctuates with the daily movements in the stock.
Traders have poured large amounts of money into options on a handful of high-tech stocks, with Tesla the most favored. Traders have spent more than $670 billion on Tesla-related options, in what’s known as a premium, according to Cboe data. That’s more than they spent on Amazon.com company ,
An apple company ,
Nvidia and Invesco QQQ Trust combined.
Initial public offerings and special purpose acquisitions companies, known as SPACs, have broken records after records. As of last week, SPACs have raised $162 billion in 2021, more than they have raised in the previous decade combined, according to Dealogic. Many of them are unprofitable. About 70% of companies going public through traditional IPOs were losing money, a larger percentage even during the tech bubble of the 1990s, according to Bank of America numbers as of November.
“This has been the year of risky assets,” said Shanta Buchtler, president of investment firm Man Group, which oversees $140 billion in assets. “Wherever there has been risk and opportunity for greater returns, we have seen that pay off in spades.”
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Heavy speculation has left some investors wondering if the markets are in a giant bubble, although some of the excitement is starting to wane. Near-zero interest rates and the central bank’s pandemic interventions have been a major support for stock markets for nearly two years now. The Fed signaled this month that it was ready to raise interest rates next year and scale back its bond-buying program at a faster pace. When prices are rising, investors have more options for where to park their money for gains and can become less willing to take risks.
Investors also have had to contend with one big factor they have mostly ignored over the past decade: inflation. Inflation in the United States last month reached its highest level in four decades, raising questions about how many price increases Americans can absorb. The emergence of the Omicron variant has rattled US stocks since Thanksgiving.
Shares of the ARK Innovation exchange trader, SPACs, and several meme stocks have all pulled back from their highs earlier in the year. More than 300 unprofitable companies are down more than 50% from their recent peak and many stocks haven’t taken part in the broader market rally in recent months. Many of the companies that debuted this year are now trading below IPO prices.
“Some of these bubbles basically burst,” said Sebastian Page, global multi-asset head of T. Rowe Price.And
who oversees about $468 billion in assets. “We have become more careful.”
write to Gunjan Banerji at [email protected]
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