Yellow metal rates in India dropped on Thursday as gold August futures were trading at Rs 47,739 per 10 gram on MCX. Silver September futures, though were trading higher at Rs 68,907 per kg, against the previous close of Rs 68,365 per kg.
At the international level, gold remained stable with minutes from the Federal Reserve’s last meeting revealing that it is planning to taper its asset purchases this year itself.
Meanwhile spot gold was at $1,803.01 per ounce. US gold futures edged 0.1 per cent higher to move to $1,804.30 per ounce.
“COMEX gold trades marginally lower near $1797 per ounce after a 0.4 per cent gain yesterday. Gold is pressurised by firmness in the US dollar as FOMC minutes added to uncertainty about Fed’s monetary tightening. Also weighing on price is continuing ETF outflows. However, supporting price is renewed virus concerns and uneven global economic recovery. Gold may remain sideways to lower as diverging monetary policy stance of Fed and other central banks may keep US dollar supported,” said Ravindra Rao, Vice President – Head Commodity Research at Kotak Securities, while commenting on gold trends.
The coronavirus pandemic plunged Americans into recession. Instead of emerging poorer, many came out ahead.
U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.
In some ways, the singularity of the Covid-19 recession—and the recovery—shouldn’t surprise. The scope of the pandemic was unprecedented in the modern era.
These actions were at the center of the unusual nature of both the recession and the recovery. They have also powered much of the stock market’s unexpected boom. Rock-bottom interest rates lured more investors into stocks; workers stuck at home tried their hand at trading and tech giants gained even more ground during the shutdown.
The stock market, in turn, became the driver of the household wealth gain, accounting for nearly half the total increase.
That has produced a lopsided distribution of the wealth gains, since well-off households are more likely to own stocks. More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%.
The gains were even more heavily concentrated at the top when Americans were grouped by wealth instead of income. (Wealth is calculated by subtracting a household’s liabilities—like mortgages and college debt—from assets such as homes and stock-market investments).
Americans with higher-income jobs fared especially well. Many white-collar employees were able to work from home, and they saved money by not commuting or eating out. The government’s stimulus checks and expanded unemployment benefits kept afloat restaurant servers, housecleaners and others in low-wage service jobs who got laid off.
SHARE YOUR THOUGHTS
How have your spending habits changed as the economy has reopened? Join the conversation below.
Many lower-income workers came out ahead. By October 2020, for example, household checking-account balances of the bottom 25% of income earners had risen roughly 50% from the year before, according to the JPMorgan Chase Institute. But much of their wealth increase came in the form of stimulus checks and unemployment benefits, which will peter out as the economy recovers.
And many low-wage jobs are still gone. As of April 2021, jobs paying more than $60,000 had grown about 2% compared with January 2020 levels, according to Opportunity Insights, a research group based at Harvard University. Jobs paying less than $27,000 had fallen nearly 24%.
The Americans who gained the most during 2020 were the ones who had much more wealth to begin with. Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.
In the second half of the year, the S&P 500 notched new records on 33 occasions. Rising stock prices accounted for close to 44% of the overall growth in household wealth in 2020.
Home prices, which are prone to fall during economic setbacks, soared instead. Houses were already in short supply, but the pandemic juiced demand and made the shortage more acute.
The median sales price of an existing home surpassed $300,000 last year for the first time and has continued to soar, topping $350,000 in May. The price gains and low rates have been a boon for homeowners, many of whom pocketed cash from their homes or saved money by refinancing into lower interest rates.
The surging prices have also pushed homeownership out of reach for many lower-income families and first-time buyers. Economists expect price growth to moderate in 2021 but not for home prices to fall.
Meanwhile, the aid that helped Americans get through the past 15 months has started to fade. States have begun reducing unemployment benefits. Three months have passed since the last round of stimulus checks. Measures that allow borrowers to postpone mortgage and student-loan payments are set to expire.
Those who missed out on wealth creation during the pandemic will be less equipped to weather the next major strain on their finances. In 2020, more than a third of adults said they might not be able to cover a sudden $400 expense in cash, according to the Fed.
Investors are rushing into longer-dated Treasurys in a bet that the Federal Reserve will act more quickly against inflation, leading to slower growth and lower interest rates in the longer term.
Yields on shorter-dated bonds rose and their prices fell Monday, reflecting higher rate expectations after the Fed’s policy meeting last week. Meanwhile, longer-dated yields dropped because higher interest rates in the near term would likely mean slower growth and lower interest rates further into the future. The shifts combined to produce what is known as the flattening of the yield curve.
“It’s flattening massively. The move has been quite brutal in the market,” said Laurent Crosnier, chief investment officer at
The Fed signaled last week that some policy makers expect two interest rate increases in 2023, and said officials had discussed an eventual tapering of bond-buying programs, although the timing remains uncertain. It also boosted inflation forecasts and said that if expectations of higher prices affect consumer and business behavior, they could act to address it. That marked a shift from a previous emphasis that inflation would be allowed to overshoot until the recovery is more certain.
The biggest moves since the Fed’s policy meeting have been in the difference between 2-year yields and 30-year yields. This has fallen by 0.25 percentage point, mostly driven by a 0.2 percentage point drop in 30-year yields to 2.023% on Monday, according to FactSet.
The gap between the 2-year and 10-year yields has also dropped significantly. Both these gaps are now back to their tightest levels since early February, before a selloff in Treasury markets that drove longer-term yields sharply higher.
A key change highlighted by Fed Chairman
came in his comments on labor markets and the high number of people who had retired during the Covid crisis, shrinking the size of the labor force. This means the economy is likely to hit full employment sooner than expected: High unemployment has been the Fed’s justification for allowing inflation to run hot in recent months.
“Employment is the key variable,” said
head of global credit strategies at fund manager Algebris.
Shortages in some labor markets and higher retirements could lead to wage inflation, which has a longer term effect on other prices than commodities, for example. But it remains hard to predict how many new jobs will be created and how many retirements will prove permanent, Mr. Gallo said. “Wage inflation is not a bad thing for society, but it might mean more volatility for financial markets.”
Bond markets in particular could see more volatility because the Fed’s tolerance for inflation is lower than people thought, according to Seamus Mac Gorain, head of global rates at J.P. Morgan Asset Management. “What this means is that the market will be very sensitive to inflation data and jobs growth from here,” he said.
The U.S. consumer-price index surged 4.2% in April and 5% in May. The latter was the biggest move in nearly 13 years.
Investors are having to rapidly unwind trades that were betting on the Fed letting inflation stay high without slowing bonds purchases or raising interest rates as the economy reopened. Money managers getting out of this so-called reflation trade is driving Monday’s moves, according to
an investment manager at Aberdeen Standard Investments.
“The market was sticking its fingers in its ears to all the signs that the Fed was shifting,” Mr. Athey said. “The positioning was heavily in reflation trades, a lot of positions are being cleaned out.”
Inflation expectations as measured by the Treasury market have declined in recent weeks. Five-year inflation expectations have eased from a peak of about 2.77% in mid May to less than 2.4%, while the 10-year forecast has dropped from 2.57% to less than 2.25%, according to
This added to heavy buying by U.S. banks starved of loan growth: They have bought a combined $139 billion so far in the second quarter, which means they are buying at a faster pace than during the first quarter, according to Deutsche Bank.
U.S. and European government bond yields ticked higher Thursday after strong business survey readings in Europe, but investors said the recent rise was overdone and that fears inflation would soon cause central banks to lift interest rates had subsided.
Encouraging figures in the European services industry purchasing managers’ surveys buoyed hopes around the reopening of the economy, though the continent’s inflation outlook remains much weaker than in the U.S. The European Central Bank will likely signal no change in the size of its bond buying at next week’s rate-setting meeting, investors said.
German 10-year yields inched up to minus 0.191% Thursday, below the recent two-year high of minus 0.108%, according to Tradeweb. U.S. 10-year Treasury yields were also marginally higher at 1.599% from 1.591% on Wednesday. This is also below a recent high of 1.683% and the March highs of about 1.73%.
Yields have risen sharply and bond prices fallen in recent weeks as investor concern grew that rising inflation would lead central banks to start tightening their monetary policy by reducing their bond purchases.
In Europe, some ECB board members suggested that the central bank should start dialing down bond purchases even though inflation expectations in Europe remain subdued. However, Isabel Schnabel, the central bank’s executive board member from Germany, has since said that cutting monetary support too early would be a great mistake.
“This has been a key source of confusion about Europe,” said Mike Bell, global market strategist at J.P. Morgan Asset Management. “There is a greater diversity of views on policy at the ECB than at the Federal Reserve.”
He added that investors had got overexcited about the potential for rate rises in the U.S. and Europe sooner than J.P. Morgan Asset Management expects. “We do still think that bond yields can move higher, but things went a long way in a very short period,” Mr. Bell said.
German 10-year yields started the year at minus 0.6%, while 10-year Treasurys were at less than 1%. Mr. Bell thinks German yields could make it back to zero by the end of 2021, and Treasury yields could get to 2% within the next 12 months.
Inflation fears have been more heated in the U.S., but many investors and analysts still expect reductions in bond buying and rate rises to be some way off.
Europe is beginning to reopen its economy as the Covid-19 crisis eases, but is behind the U.S. in several ways. The eurozone is less than halfway toward its target of vaccinating 70% of adults, and its financial stimulus has been slower, smaller and less targeted at consumers than the U.S.’s version, according to analysts.
Europe’s inflation outlook also looks weak. The headline rate will rise above the ECB’s target of below but close to 2% this year, but only because of energy costs and higher German sales taxes, according to Morgan Stanley economists. Inflation will be well below target this year excluding those factors and remain there even including energy in 2022, they estimate.
“The rebound in consumer demand in the U.S. is just not being seen in Europe,” said Dominic White, head of economics at Absolute Strategy Research. “There will be a rebound in spending in Europe as it opens up, but nowhere near what we’re seeing in the U.S.”
Some investors are preparing for wild swings in financial markets, worried that inflation, and the Federal Reserve’s pledge to let it rise, will lead to a more volatile world.
The reason: The economic policies aiming to create inflation now are the opposite of the ones that kept markets relatively stable for decades.
Simplify Asset Management recently launched the Interest Rate Hedge ETF, which will seek to take advantage of what its backers see as a titanic shift in markets and is designed specifically to gain from rising longer-term Treasury yields.
The ETF, run by
a former Merrill Lynch trader who developed a widely followed measure of bond-market volatility known as the MOVE index, will put half its cash in long-term Treasurys and half in long-term options that gain if seven-year interest rates rise above 4.25%.
That is high compared with current seven-year Treasury yields of about 1.25%. But at higher levels of rates, between 3.5% and 5%, stock and bond prices become more volatile and move in sync—so this ETF is meant to protect investors from that outcome too, Mr. Bassman said.
“The idea of the Fed from 2009 onward was to force money out of safe assets into riskier assets, which would fund growth,” Mr. Bassman said.
Investors bought longer-dated bonds, riskier credit instruments and complex products that directly or indirectly involve selling options to generate income, Mr. Bassman said. These kinds of investments don’t work when inflation and volatility rise, he added.
Other investors agree that the Fed’s focus in recent decades on supporting the economy by keeping financial markets stable will be upended by its more liberal stance on inflation since the Covid-19 pandemic began. In the past, when things got rocky, the Fed boosted liquidity, cut the cost of credit and ultimately buoyed stock prices.
That was a virtuous circle while inflation is low and the Fed could step in whenever volatility jumped—the broad trend of the past 30 years.
But it will become a vicious one, according to
chief investment officer of Austin, Texas-based Artemis Capital Management. The Fed has promised it won’t tighten monetary policy until inflation is well and truly here and has run hot for a spell.
This means the Fed will end up restricting credit when higher inflation is already making markets more volatile, and that action will feed volatility, making things worse, according to Mr. Cole. “The problem here is if we get inflation—real inflation—it removes the Fed’s monetary ability to support credit, ” he said.
Mr. Cole is well known on Wall Street for a long paper he wrote in 2017. He described how huge amounts of money were in effect betting that volatility would ease and stay low, whether investors knew it or not. A volatility spike in early 2018 proved him right.
He sees danger from the decades that investors have spent getting used to the old paradigm that kept volatility contained. When trouble loomed and stocks fell, investors relied on bond prices being lifted by Fed rate cuts and, since 2008, bond buying. That would provide gains to cushion stock losses. Then easy-money policies would help kick-start more lending—in bond markets as well as by banks—which in turn would lift stocks again.
This pattern, which has played out in all of the downturns since the late 1990s, is behind the popularity of passive investing, balanced portfolios of stocks and bonds and specialist fund strategies such as risk parity and volatility control. All of these make implicit bets that volatility declines or remains low: They are short volatility, in the jargon.
Today more than $1 trillion is still invested in these specialist strategies and trillions more in passive funds, according to analysts. Over $100 billion is invested in strategies that use options to make explicit short volatility bets, having been rebuilt even after last year’s huge volatility spike because once again, the Fed rescued markets.
“The implicit assumption of continued Fed support has massively incentivized the short volatility trade,” Mr. Cole said.
Artemis Capital’s answer is to buy insurance against rising volatility through options markets and bet on trends in commodities and currencies to the same extent as owning traditional stocks and bonds. There is a fifth leg to this stool too: owning alternatives to regular currency, which means gold and to a cautious extent cryptocurrencies.
SHARE YOUR THOUGHTS
What adjustments do you plan to your portfolio to address volatility in the markets? Join the conversation below.
Other investors say the greater role government spending began to play during the Covid-19 pandemic will add to the volatility. Governments will want inflation to run hot to help erode the size of the debt they have taken on.
“We know that when the economy slows again, fiscal stimulus will be the answer rather than monetary stimulus,” said
who runs the Total Return Fund of London-based Ruffer LLP.
Ruffer’s long-term view is that trends of the next 30 years will roughly mirror the past 30 years: a steady decline in asset values in inflation-adjusted terms, punctuated by occasional upcrashes, or sudden rallies driven by inflationary injections of government spending or tax cuts.
Mr. Smith said governments such as the U.S. will cut their debts by reducing their real value over time through inflation, as happened after World War II. They won’t do it by trying to repay borrowing with spending cuts and taxes, as they have since the 1990s.
Ruffer’s strategy is to own inflation-linked bonds, gold and potentially bitcoin to protect against inflation—although a recent experiment owning bitcoin ended in April because its huge rally made it too risky.
Mr. Smith is also getting protection against a jump in volatility by betting on corporate debt in credit-derivatives markets: He buys protection against default among the most popular companies that are cheapest to insure, and sells protection on a handful of the most deeply unpopular ones.
To help protect against the risks of inflationary bursts, he also holds shares in companies that do well when bond yields rise. Right now, that means banks, especially cheap U.K. and European ones.
There are other ETFs that offer direct defenses against volatility and inflation—for example, Quadratic Capital Management’s Interest Rate Volatility and Inflation Hedge ETF, run by Nancy Davis. It is set up to profit from rising interest-rate volatility and long-term yields rising faster than short-term yields, while also investing in inflation-linked Treasurys.
Ms. Davis said the fund is meant to be a better protection against inflation than buying esoteric commodities that suddenly prove popular, such as lumber.
During earnings season in the middle of a pandemic, there would seem to be no shortage of things for investors to fret about. Could a new variant of the virus knock markets? Or negative guidance from a major American company reset earnings expectations?
Perhaps not. An offhand comment by Treasury Secretary
about interest rates on Tuesday revealed what is fueling market sentiment, to the exception of almost anything else.
Speaking at an event with the Atlantic, Ms. Yellen said, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.” She was referring in particular to the Biden administration’s planned long-term spending, some of it years down the line, when the economy will probably be much closer to full employment.
To be sure, the market was already down for the day when the Treasury Secretary’s comments hit the wires, but it’s telling that such an anodyne remark—by someone who knows very well the clear demarcation between Federal Reserve and Treasury policy—could deliver such a jolt. Ms. Yellen walked back her comments later, at The Wall Street Journal’s CEO Council Summit.
How the Fed reacts to the economic recovery and the administration’s bulging spending plans isn’t all that matters, but it sometimes seems like investors believe that it is. Chairman
has repeatedly stressed that the Fed intends to sit on its hands and allow inflation to stray marginally above 2% without acting to cool the economy.
Investors largely trust Mr. Powell, but they’re cautious too. The possibility of a bond-market tantrum or higher inflation has supplanted pandemic-related risks as investors’ greatest concern
Still, investors seem skeptical of an even-better outcome in which the economy’s capacity for growth is lifted by favorable demographic changes, technological innovation or government investment. Here is a closer look at investors’ bets on the economy:
The Fed’s key interest rate, monthly
Effective federal-funds rate
Last year’s expectation
The federal-funds rate set by the Fed is a measure of the economy’s strength. When the economy is stronger, the Fed raises the short-term rate to make sure inflation doesn’t rise too far above its 2% annual target. When it is weaker, the Fed cuts rates to lower borrowing costs for businesses and consumers and boost economic activity.
The yield on a U.S. government bond largely reflects investors’ expectations for the fed-funds rate over the life of the bond. The 10-year yield fell to a record low last year, signaling short-term rates near zero for years to come. The yield’s rebound this year reflects bets on a strong economic rebound and higher rates.
Investors wager on the future level of the federal-funds rate in the overnight index swap market. Last summer, investors thought the short-term rate would be slow to rise in coming years and would level off below its pre-pandemic peak, reflecting a deeply damaged economy.
The current expectation is more optimistic.
Notably, investors think the Fed will be able to raise rates much sooner than it did after the 2008-09 financial crisis and at a similar pace.
But investors also think the Fed won’t raise rates higher than it did before the pandemic. The Fed’s terminal rate has dropped in recent decades, reflecting in part an apparent decline in sustainable economic growth. Investors now envision a new version of the pre-pandemic economy—not a fundamentally stronger one.
Inflation and monetary policy
Lackluster inflation has been a defining characteristic of the U.S. economy in the years since the 2008-09 crisis. The widely tracked consumer-price index has struggled to stay above the Fed’s 2% target. The Fed’s preferred gauge, the personal consumption expenditures price index, has typically shown even less inflation.
Investors’ expectations for inflation—as defined by the consumer-price index—over the next 10 years can be gleaned from the difference between nominal and inflation-protected U.S. Treasury yields. Investors are hardly expecting runaway inflation. But they expect sustained inflation around the Fed’s target, even as the central bank raises interest rates.
Investors’ optimism about the future is apparent in stocks as well as bonds. Major indexes have continued to climb this year even as Treasury yields have shot upward, another sign of investors’ confidence that the economy can withstand higher interest rates.
That isn’t always the case. In late 2018, the yield on the 10-year U.S. Treasury note climbed as high as 3.2% with investors anticipating more interest-rate increases from the Fed. Stocks fell sharply and fully recovered only when Fed Chairman
signaled easier money policies.
This year, there have been some stock-market jitters as yields climbed. High-growth tech shares in particular are seen as more vulnerable to higher rates because their valuations are based more on future earnings. But the market has still managed to power forward, and even the tech-heavy Nasdaq Composite Index has bounced back recently—another sign that investors don’t expect a fundamentally different economy or rate environment than existed before the pandemic.
Investors have a decidedly mixed record of predicting the future, having repeatedly overestimated what short-term interest would be in recent years.
Federal-funds rate target with expected trajectory implied by futures
Federal-funds rate target with expected trajectory implied by futures
Federal-funds rate target with expected trajectory implied by futures
Federal-funds rate target with
expected trajectory implied by futures
Investors may have a natural bias toward preparing for higher rates since they stand to lose money on Treasurys if yields rise, said
head of global policy research at Cornerstone Macro. That tendency could be even more pronounced when short-term rates are at zero and there is essentially only one way for them to move, given repeated statements from Fed officials that they don’t like the idea of negative rates.
Mr. Perli said some investors think: “I don’t think the Fed is really going to raise rates next year, but if it does my portfolio is going to lose a lot of money, so it’s sensible for me to hedge this risk.”
U.S. government bonds showed signs of stabilizing Friday, with yields swinging between small gains and declines after rising sharply a day earlier.
The yield on the benchmark 10-year Treasury note recently traded around 1.501%, according to Tradeweb, down from 1.513% at Thursday’s close.
Yields, which rise when bond prices fall, soared on Thursday as a weekslong selloff intensified—fueled by bets that the Federal Reserve will start raising interest rates earlier than previously expected in response to what investors widely expect to be a burst of economic growth and inflation later this year.
The 10-year yield logged its largest one-day gain since Nov. 9 during Thursday’s session to finish at its highest closing level in a year. The five-year yield, which is more sensitive to the near-term outlook for interest rates, experienced its largest one-day gain in more than 10 years.
Selling, though, abated Friday, as the higher yields attracted buyers.
While many investors expected the 10-year yield to move higher in 2021, the jump to 1.5% from around 1% in a matter of weeks is raising some concerns. While Fed officials have said that the yield’s climb toward pre-pandemic levels marks a return to normalcy, some investors worry their lack of concern could spur more selling.
“Thursday’s rate move shows some signs of the dysfunction that prompted Fed action in March ,” wrote Bank of America analysts in a Friday note. “However, the Fed will be challenged to push back aggressively on the move, since, so far, they have described it as reflecting ‘healthy’ factors.”
After falling overnight, yields did tick higher early Friday after the Commerce Department released new data showing U.S. household income jumped 10% in January and consumer spending rose 2.4%, suggesting the economy is primed for a burst in growth this year.
Investors tend to sell Treasurys when they expect faster growth and inflation, which lowers the value of bonds’ fixed payments and can prompt the Fed to raise interest rates. Their optimism has been lifted recently by improving economic data, the promise of more government spending and the expanding distribution of coronavirus vaccines.
The pandemic will leave Western nations carrying the biggest public-debt pile as a percentage of gross domestic product since World War II. To deal with it, they will need a better grasp of inflation.
So far, fears about high debt-to-GDP ratios have been proven repeatedly wrong. Even so, officials are already trying to set limits. In the eurozone, deficit caps will likely return. In the U.K., Treasury chief
has dubbed the path of public finances “unsustainable.”
The latter focus has been popularized by the contentious school of thought known as Modern Monetary Theory, but the divide isn’t what it seems. Even vociferous opponents of MMT share the assumption that inflation is the true constraint on fiscal policy. The differences concern how inflation works.
Among the traditionalists, ex-Treasury Secretary
recently wrote that debt hasn’t been a problem because interest rates are so low. Governments can spend, they argued, as long as their net interest payments stay below 1% of GDP, adjusted for inflation.
For former International Monetary Fund chief economist
the key is that government bond yields are lower than expected GDP growth rates. Even if a one-off stimulus leads debt-to-GDP to shoot up, forward-looking investors then know that the math will eventually bring it down—as happened after WWII.
Both arguments raise the specter of market forces: Loose debt issuance is allowed now but may not be in the future. Since 1881, bond yields have been above growth rates about 40% of the time, including most of the post-1980s era.
But, as Mr. Summers himself recently underscored, bond yields are also linked to inflation. If governments keep borrowing too much, the theory goes, interest rates will rise. At some point, printing money will be the only alternative to a default, creating inflation. By contrast, MMT advocates see inflation as a result of too much spending, regardless of whether it is financed by money or debt. This is the real clash.
So far, the latter theory seems to fit the facts better, given that central banks have spent a decade buying trillions of dollars of bonds without triggering inflation.
Many economists argue that this is yet another result of rates being suppressed by social and market forces, but this is also suspect. Inflation-adjusted long-term yields have historically tracked central-bank policy, even in periods when central banks weren’t focused on growth and inflation, such as under the 1880-1914 gold standard. The fact they are deeply negative now says much more about Federal Reserve policy than economic fundamentals.
If interest payments on the debt are themselves broadly determined by policy makers, they can’t be a good canary in the coal mine. Fiscal policy could be both too tight and too loose and still comply with such a rule.
What indicators should policy makers follow then? Inflation itself is a good bet, though consumer-price baskets are crude—they often obfuscate specific supply shortages, as happened this year. Governments will need to monitor and control consumer spending and industry bottlenecks, as well as automatically link stimulus programs to persistent increases in unemployment, rather than leaving them to officials’ discretion. Outside of the U.S., much more attention should be devoted to the exchange rate, since depreciation can create inflationary spirals.
It is understanding inflation, not bond markets, that will set fiscal policy free.
Worries about the rapidly spreading coronavirus in the first part of the year sent stocks, gold and bonds tumbling and triggered spasms in historically safe markets like money-market funds. The Federal Reserve’s massive stimulus package and, later, news of a vaccine, stoked a simultaneous rally in various markets. The moves have been underpinned by an excitement for investing that hasn’t been seen in decades, as people of all ages jumped into the market to ride its wild moves.
Stocks soared in 2020. After plunging into a bear market—defined as a drop of at least 20%—a new bull market emerged, one that raced to new highs faster than ever before. The S&P 500 climbed 16.3% to end the year at 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 U.S. economy and markets on the biggest bust-to-boom roller coaster we’ve seen,” said
chief investment strategist at the Leuthold Group. “It caused people to dump far more when it was collapsing—has caused them to chase assets on the way up.”
Here are five investment trends that boomed in 2020, defying many market watchers’ expectations. Whether these continue may decide much about the investing world in 2021.
The Momentum Trade
Under the surface, many individual stocks logged even more astronomical gains than the broader market. More stocks gained at least 400% at their yearly peaks in 2020 than in any year since 2002, according to a Dow Jones Market Data analysis of FactSet data, which looked at companies with a market value of at least $100 million.
Many retail and institutional investors turned to the momentum trade, or buying shares of companies that have risen sharply while dumping the relative losers. About $21 billion was recently sitting in exchange-traded funds tracking momentum, FactSet data show, the most in at least a decade.
“Higher stock prices show certain companies to be winners, attracting more people to do the same thing,” said
co-chief investment officer at True Partner Capital. “When herds start to agree with certain talking points and that starts to be reflected in the valuation, it can become a self-fulfilling prophecy.”
Of course, some investors say it is more than just excitement, calling the current environment a bubble. Among those is
who pointed to exuberance in the market for initial public offerings and soaring volumes in speculative bets like options in a third-quarter update for investors in his hedge fund Greenlight Capital.
“There are many anecdotes for toppy behavior. We will share one: We recently received a job application with the email subject, ‘I am young, but good at investments’ from a 13-year-old who purports to have quadrupled his money since February,” Mr. Einhorn wrote in the update, which was viewed by The Wall Street Journal.
Investors aren’t just looking to profit from the rising stock market. They are magnifying investments through options, contracts giving investors the right to buy or sell stocks later in time at specific prices. The market for stock options, which suffered years of flatlining volumes, roared to life as investors piled in. The sector, often thought to be the domain of sophisticated derivatives experts, became a playground for investors young and old, amateur and skilled.
Options volumes jumped to the highest level on record, according to Options Clearing Corp. data going back to 1973, with roughly 30 million contracts a day changing hands, up from around 19 million in 2019. Investors looked to bet on moves up and down in stocks and indexes, often cashing out of positions within hours or days to pocket profits.
Investors have often turned to options this year to bet on the stock market’s wild moves—both up and down. The contracts allow investors to put down a relatively small sum to wager on the stock market’s direction. Of course, losses can add up if an investor’s hunch is wrong, and riskier plays can burn an even bigger hole in an investor’s portfolio.
In one sign of the optimism permeating markets, bullish call options—those that give investors the right to buy shares later in time—flourished, as investors looked to profit from stocks’ ascent.
have been among the most popular in the entire market. At times, investors said the heavy derivatives activity drove big moves in the stock market itself, a sign of its growing influence on stocks. To some, the activity is a sign that investors are more comfortable taking risks than they were in the past, especially with bond yields falling lower and lower.
“All of this is driven by this Federal Reserve, zero-interest rate, [quantitative easing] world where people are forced to stretch and contort their positioning in the market to extremes,” said
a senior managing partner at volatility hedge fund Aegea Capital Management. “This is a market built on…. very high leverage.”
analysts wrote to clients in December, saying that 2020 “will undoubtedly be known as the year of the SPAC.”
The firm attributed increased activity to heavy trading from individual investors as well as low interest rates that boosted SPACs’ allure.
Over the past decade, about half of acquisitions among SPACs were in the industrial, financial and energy sectors and just around a third were in information technology and health care, according to Goldman. In 2020, almost 70% were in the tech, consumer discretionary and health-care sectors, aligning with the biggest stock winners.
Many say they expect the trend to continue after many success stories.
, for example, surged 335% and 48%, respectively, in 2020 after going public through SPACs.
As stocks like Tesla and Apple hit highs and options volumes swelled, the divergence between companies promising high growth in the future and other corners of the market grew starker than ever. Shares of companies viewed as bargains in the market, value stocks, floundered, and the gap between the market’s haves and have-nots has never been this wide.
The Russell 1000 growth index outperformed its value counterpart by the largest margin on record, according to Dow Jones Market Data. And while the broader market is flying high, traditional value groups like the S&P 500’s energy sector declined by more than 35% and the financials group fell 4.1%.
Perhaps nowhere was the zeal for risky investments as evident as it was in cryptocurrencies, where bitcoin prices surged to the first record in nearly three years, crossing the $20,000 mark.
The surge was driven by individual and institutional investors alike, many wading into the market for the first time. Bitcoin kept rising through December to close the year at $28,966.18.