The S&P 500 capped its remarkable rise over the last 12 months by hitting 4,000 for the first time in history on April 1. No joke, and you’d never guess that 2020 had been a plague year.
Vaccines are being jabbed into millions of arms and Covid-19 infections and deaths are on the decline, but the crazy good market keeps delivering in 2021. Staid investment firms are offering their clients cryptocurrency, a newly minted day-trading millionaire who goes by DeepF***ingValue testified before Congress and suddenly everyone’s afraid of inflation.
To commemorate the strange nature of investing in these times, Forbes Advisor is taking a look back at the key moments and themes that have defined the last 12 months of the Covid-19 bull market.
The Shortest Bear Market in History
The stock market’s reaction to the initial onslaught of Covid-19 in Western Europe was swift and severe. The S&P 500 hit an all-time high on February 19, 2020, and then proceeded to drop 34% over the following month. Americans were properly freaked out as employers wasted no time laying off workers en masse, the bond market seized up and entire industries seemed to freeze in place overnight.
“This is what panic looks like,” Patrick Healey, president and founder of Caliber Financial Partners, told the Wall Street Journal on March 20, 2020.
At first, investors were left with a dizzying case of deja vu. It took a long time for markets to recover from the more than 20% declines of the last two bear markets. It took eight years for the S&P 500 to equal its prior high after the dot-com bubble burst in 2000, while it took about six years after the Great Recession..
But the turnaround was as swift as the fall. Stocks bottomed in late March and went straight up—by August 18, the S&P 500 had fully recovered. CFRA Chief Investment Strategist Sam Stovall says that this was the shortest bear market on record. The S&P 500 marked 20 all-time highs in 2020 and ended the year up 16%. In the 12 months since the bull market began, the benchmark index has gained about 75%.
While that’s a great outcome for investors large and small—especially those who didn’t panic—take it with a grain of salt.
Why? Let’s say you had $100 and it all of a sudden dropped 34%. You’re left with $66. If the gods smiled upon you and gave you back a 34% gain, you’d only have $88.44. In fact, you’d need 52% jump just to get back to even.
Here’s your 2020 takeaway: Fast recoveries are fine, but remember you need a bigger gain after a fall just to get back to where you were.
Chaos in Markets
As stocks dropped off a cliff last March, a bunch of very weird stuff was happening in markets:
- In two days of trading last March, stocks collapsed 14% while the yield on 10-year Treasuries jumped 0.10 percentage points. In the bond market, when yields rise, it means bonds are doing worse. And it’s really odd when both stocks and bonds are doing worse. Normally, when people are selling stocks, they’re “fleeing to safety” and buying bonds—not last spring, though.
- The 30-year fixed-rate mortgage was behaving strangely, dropping to 3.29% on March 5 before climbing to 3.65% two weeks later. That is a relatively huge move in mortgage rates over a two-week period.
- Gold endured a titanic sell-off, falling from $1,687 per ounce on March 6 to about $1,472 a week-and-a-half later. Like Treasuries, angsty investors typically buy up the yellow metal when times are hard.
That doesn’t even include that moment in April when oil prices went negative for the first time in history!
“Investors everywhere in the world, for a period of weeks, wanted to sell everything that wasn’t cash or a short-term Treasury instrument,” said Federal Reserve Chair Jerome Powell in a June 2020 press conference. “They didn’t want it to have any risk at all. And so what happened is, markets stopped working.”
Investors were terrified and smashed the sell button on just about everything they could as quickly as possible to get cash. Market observers feared the Covid-19 crisis was rapidly morphing into a full-fledged financial panic as the economy ground to a halt. It’s hard to overemphasize how harrowing those first days were, when people had started passing around the d-word—depression—as the most likely outcome. This also illustrates why so many people were so very surprised at how quickly everything turned around.
Into the breach stepped the Federal Reserve. Meeting over the course of March, the Fed cut interest rates, first by half a percentage point and then all the way down to zero two weeks later.
Equally important was the rapid restart of quantitative easing (QE), which helped drag the economy out of the Great Recession a decade earlier. The Fed bought trillions in bonds, promised to purchase billions more in commercial loans and resolved to shore up money market funds.
Congress did its bit, too, passing the $2.2 trillion CARES Act without delay. Taken together, these actions stabilized the market and set the table for the rapid recovery in stocks. A year later, though, we’ve stepped through the looking glass. Investors are now worried that the trillions of dollars pumped into the economy by the Fed and Congress, plus exuberant consumers who are ready to spend as social distancing ends, means inflation is going to get out of control.
As a result the yield on the 10-Year Treasury has risen to about 1.7%, or roughly where it was before the crisis began.
A Sea of Greater Fools
In 2020, Toyota sold more than 2 million cars in America, more than any other automarker. Meanwhile, Tesla sold nearly 300,000 cars, an order of magnitude fewer than Toyota. Yet Tesla ended the year with an enterprise value of $678 billion, roughly 21 times greater than Toyota’s.
What gives? With the Fed dropping rates to zero, and cheap money flooding the system, investors became enamored with potential. Perhaps that’s why Tesla’s enterprise value was eight times greater than it had been a year earlier. Tesla, led by Elon Musk, claims it will sell 20 million cars by the end of the decade.
Is that even in the realm of possibility? “That is something we cannot yet model because it means Tesla would be about twice the size of where Toyota and Volkswagen are today,” noted Morningstar analyst David Whinston.
Still, Tesla’s recent addition to the S&P 500 seemed to confer legitimacy on Musk’s vision for a dynamic company that actually changes how we travel and consume energy.
Then there’s Bitcoin, which doesn’t do much of anything. Nevertheless, the world’s most famous cryptocurrency enjoyed another banner year, briefly topping $60,000 just after the one-year anniversary of its March 2020 bottom. A year ago, it was trading around $4,800.
Of course, Bitcoin’s rise hasn’t come completely out of nowhere. More and more established financial institutions and mobile-friendly start-ups have made it easier and easier for all kinds of investors to get in on the action. The demand is so high that Coinbase, a cryptocurrency exchange, announced that it’s going public to much fanfare.
It’s worth remembering that Bitcoin was created to replace America’s clunky and expensive payment systems with something cheaper and more elegant. Instead, Bitcoin has morphed into digital gold. That may be an fascinating development, but it’s hardly revolutionary.
The Return of the Day Trader
Among the weirdest months of the last year was January 2021. A marauding horde ramshackled the U.S. Capitol, the third wave of Covid-19 crested and President Joe Biden was sworn in to a sparse crowd in a heavily fortified Washington, D.C.
In markets, a fever of enthusiasm for meme stocks took hold, as a cadre of Reddit-dwelling, Robinhood-trading, self-proclaimed morons took on the Wall Street swells and won (kind of).
The headline bout took place over the fate of GameStop (GME), a brick-and-mortar video game retailer that had been left for dead by online competitors. Hedge funds had been shorting GameStock, in hopes that its stock value would keep dropping. (Remember, short traders make money when a stock loses value.) And for a while, the hedgies were winning.
The novice day-traders who congregated online at Reddit’s r/WallStreetBets noticed the big shorts in GameStop and decided the company was being unfairly picked on. They started buying in late 2020, and by January 2021 their motley crusade became front-page news. In August 2019 the company had been worth about $300 million. By January, it was worth more than $22 billion.
And then all hell broke loose. Claiming pressure from its clearinghouse due to rising volatility, Robinhood (and several other online brokers) limited trading in GameStock. Shares of the company plummeted and lots of important people and regular folks on the internet got very, very upset. By the time Keith Gill—aka DeepF***ingValue—and Robinhood CEO Vlad Tenev were hauled before Congress to explain themselves, GameStop was worth less than $3 billion.
The GameStop controversy took the nation’s attention for a brief moment because it involved so many themes and developments exposed by the Covid lockdowns. Wall Street vs. Main Street, the proliferation of commission-free trading and gamified investing, thousands bored at home with a stimulus check burning a hole in their pocket.
“The retail investor became a force in the marketplace,” said Kerim Derhalli, chief executive of investing app Invstr.
Post-script: Shares of GameStock have risen, Lazarus-like, over recent weeks to give the company a market cap of more than $12 billion.
What’s in Store for 2021?
The nuttiness continues apace as we enter year two of the Covid-19 market.
Celebrities like Shaquille O’Neal are backing so-called special purpose acquisition companies (SPACs), with an eye to snapping up hot start-ups. Investors are spending insane amounts of money to buy digital art via non-fungible tokens (NFTs). Overleveraged hedge funds are blowing up and taking down the share prices of huge, multinational financial services companies with them.
In spring 2020, the entire world was gunning for cash, and now folks can’t get rid of their cash fast enough, said Joe Duran, head of Goldman Sachs Personal Financial Management. With interest rates near zero for the foreseeable future, and stocks expensively priced, this could lead to yet more volatility in the year to come.
But Duran is optimistic. Investors have been through two massive bear markets in recent years and largely held on like financial advisors advise, showing they’ve internalized Kipling-like wisdom.
“The average investor is smarter, more realistic and not as prone to making unmanaged reactions than they’re given credit for,” said Duran.
Still, that sagacity might be tested in strange ways over the upcoming months. The equity market is a forward-looking beast, and it’s not unlikely that stocks will stumble around a bit given just how high valuations are.
Should that occur you’d need to, once again, keep your head when all else are seemingly losing theirs.