TFinancial markets have climbed into a wall of anxiety into 2021, as investors push asset prices higher in the face of persistent high inflation, a global supply chain crisis and one of the most frantic speculative booms in decades.
Stocks soared to record highs as money flowed into stocks, dealmaking surged, and investment hitting new heights. Here are some of the highlights of a volatile year.
meme stock mayhem
The drama of the year began on Wall Street, as groups of retailers teamed up through online forums to attempt one of the biggest short squeezes in market history.
Organized by a Wall Street group on Reddit, they settled on ramshackle stocks that hedge funds had been discounting (by selling borrowed shares, planning to buy back them cheaper in the future).
In the frenzy that gripped Wall Street, the WSB Army used two weapons to curtail hedges: call options—derivatives that gave the right to buy shares at a certain price—and memes, to fuel their orderly buying, which they exploited by a public aversion to predatory speculators.
The phenomenon began with GameStop, the US video game retailer, sending its stock price up a staggering 1,700% in one month, and for a brief period causing markets to fluctuate as hedge funds incur heavy losses trying to buy back borrowed shares.
But that pressure was significantly and controversially punctured after trading app Robinhood limited stock purchases. It blamed the demands of its own clearinghouses. r/wallstreetbets yelled in error, though a lawsuit alleging a conspiracy with Citadel Securities was dismissed last month.
This saga has resulted in a new vocabulary entering the markets, as ‘diamond’ traders refuse to fold their positions, and yolo (you only live once) cry as they embark on risky but profitable deals.
The GameStop craze repeated with cinema group AMC, retail chain Bed Bath & Beyond and car rental group Avis, which have caught on several times a year.
Those rally ended in tears for some retailers, who were left holding the bag as the meme’s shares tumbled. But despite the crash in late December, GameStop is still up 700% this year, with AMC up nearly 1,200%.
Spacs . Race
Spacs — set up to buy out other hitherto unknown companies — also thrived early in the year, before fading out because some underperformed. By December, one fund tracking Spacs was down more than 20% for the year, while the S&P 500 was up more than a quarter.
The speculative fever was driven by a lot of money flowing around the system, thanks to low interest rates and pandemic stimulus programmes.
“The main issue remains how the price of all financial assets remains significantly inflated on a relative and explicit basis,” says Bill Blaine, strategist at Shard Capital.
Central bankers continued their ultra-loose monetary policy into 2021, repeatedly assuaging markets that the price hike would be temporary. The US Federal Reserve continued to buy $120bn (£89bn) of bonds each month, but finally began scaling back the program in November as inflation hit its highest level in decades.
Blaine argues that this “critical distortion” has distorted the way people think in free capitalist markets. Distorting financial asset prices have all sorts of unintended consequences—from disrupting the normal ‘business cycle’ by allowing aging zombie firms to survive, to stifling and distorting business development, to facilitating misdirection of capital within the economy.
Or, as the Wall Street Bates audience put it, “the money printer goes blr.”
These massive distortions were most evident in the cryptocurrency market, where the combined value of Bitcoin, Ethereum, and newcomers like Solano reached $3 trillion in the summer, before prices plummeted later in the year.
Crypto has had some major breakthroughs – El Salvador became the first country to legally tender for bitcoin, in a launch marred by some technical glitches – but there have also been several sudden meltdowns, including the Chinese crackdown on bitcoin mining. After hitting record highs of around $69,000, Bitcoin finished the year at just under $50,000, up 64% on the year.
supply chain shocks
Supply chain problems have swept the global economy, with severe consequences for commodity stocks. Covid disruption to trade and factory production networks worsened after the container ship Ever Given became stuck in the Suez Canal in March.
While iron ore and copper have seen fluctuations, sawn timber prices have really stood out. They jumped in the first half of 2021, jumping 400% to a peak of $1,700 per 1,000 slab feet in May amid supply shortages. But then prices fell as builders put building projects on ice. Agricultural inflation has hit people very hard as well. Global food prices have reached a 10-year high, with corn and wheat prices up 20%, and Arabica coffee beans up 80%.
Had investors known on January 1 that US inflation would hit 6.8%, a 39-year high, by November, they would have forgave investing in gold. But the traditional inflation hedge had its worst year since 2015, losing about 4% and pulling back on many other assets.
Inflation has also affected fixed income assets, as global bond markets are on track for their worst year since 1999.
Overall, the UK’s FTSE 100 has had a strong year, up around 14%. Wall Street saw solid gains, with the Nasdaq Composite up 21% and the broad S&P 500 Index up 28% over the year, including a record high of 70.
Big tech is growing more than ever, with Apple, Google, Microsoft, Nvidia and Tesla accounting for more than a third of S&P 500 revenue this year.
But smaller, less profitable tech stocks slumped, as their pandemic sales growth slowed and the US Federal Reserve’s move toward raising interest rates next year, reducing their appeal as growth stocks.
An index of unprofitable US tech stocks created by Goldman Sachs was hit in November. By the end of the year, the bull market for tech IPOs had turned into a bear, with at least 20% off its high in the US tech sector.
Video conferencing operator Zoom is down 45% for the year, while Peloton has fumbled 75% near its pre-pandemic lows, weighed down by the reluctant cameo in Sex and the City.
“At the outside end, the stocks that would not have seemed out of place in the 2000/2001 tech bubble are on average 60% lower than they were earlier in the year,” notes David Miller, chief investment officer at Quilter Cheviot.
“Chinese tech companies have fallen by a similar amount, but for different reasons. Resourceful strategists are still dragging the growth spin to value as if it really happened.”
Beijing has given markets several concerns, as debt-laden real estate conglomerate Evergrande threatens to cause a chaotic meltdown, rocking the Chinese economy.
In the summer, President Xi Jinping launched a crackdown on technology companies, sending shares in overseas listed companies such as passenger service Didi Plunge. Restrictions on the education sector, and tighter controls on children’s playing video games, have also unsettled some stocks.
It was a record year for global mergers and acquisitions (M&A) activity, as equity pools and soaring valuations led to a downward spiral of deal-making. The value of global mergers and acquisitions topped $5 trillion for the first time ever, according to Dealogic data, surpassing the record $4.42 trillion set in 2007, before the financial crisis.
But veteran investor Charlie Munger received a word of caution this month. Markets have been greatly exaggerated in some places, Munger, 97, told a conference, warning that “I consider this era crazier than the dotcom era.”