While unemployment ballooned and the global economy collapsed in the months following the onset of the COVID-19 pandemic, an odd thing happened:
The stock market rose to record levels, relatively new asset classes such as cryptocurrencies headed to the moon, and individual investors had hedge fund managers reeling.
There's been a lot going on in the world of investing, and some of the change likely is here to stay, according to investing and asset management experts at the
Fed Fuels Wall Street Rally
A year after government lockdowns sent the
That dichotomy will no doubt have some people puzzled, but it shouldn't.
The economy and the stock market aren't synonymous. They can, and frequently do, behave in different ways. 'The stock market is not an indicator of the economy as a whole, but rather of the health of public companies,' professor Elena Loutskina said. 'The companies that were able to invest in tech won the market.'
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Darden professor Elena Loutskina explored the rise of the stock market during the pandemic, when many other areas of the economy were in a tailspin. (Contributed photo)
Small and medium-sized retailers, however, saw a lot of financial pain.
Another significant factor helping lift stocks was the ultra-low borrowing costs that came as a result of a sharp change in policy by the
Ultimately, that helped big business.
The Cheap Money Effect and the Gamification of Investing
Cheap money rarely comes without some unexpected consequences. In this case, it seems to have given rise to what some people would call the 'Robinhood-GameStop effect.'
In early 2021, a group of individual - or retail - investors, who largely invested using online broker Robinhood, coordinated via social media platforms like Reddit to buy stock in beleaguered video game retailer
It comes down to the availability of cheap money, said
'The low cost of capital is driving a technological boom,' he said. On
Zero-cost investing has led to what Sullivan calls the 'gamification' of investing.
'Some people think of it as a game, and they are investing based on a hunch or what a friend says,' he said. That's quite different from traditional investing, which involves the long-term process of extracting potential gains from the market.
Sullivan worries that low costs will lure individuals into frequent trading, and ultimately, some naive investors will see some painful losses. 'Gamification is changing investing. It is here to stay, and it's dangerous,' he said.
Blockchain Goes Beyond Bitcoin, Unleashes NFTs
Low capital costs also have helped usher in the rise of cryptocurrencies, such as Bitcoin. Through mid-April, Bitcoin prices had grown to
'Would we have crypto if we didn't have technology? Probably not,' Sullivan said. All cryptos rely on technology for their existence, and they need it to be traded.
Likewise, nonfungible tokens, or NFTs, use blockchain technology, just like Bitcoin and other emerging cryptocurrencies. The encryption provided by the blockchain means that people cannot replicate these discrete, individually identifiable electronic items: One NFT isn't the same as another NFT. That makes them different from cryptocurrencies, which are interchangeable (fungible), one for another.
And they can get sold for large sums.
The New York Times columnist
Christie's auctioned an NFT for the first time in March, a digital photo collage by the artist known as Beeple that sold to the tune of
Just as technology has upended the way we use banks, it appears that it may change the way we invest in unique items, such as art and sports collectibles. In other words, NFTs may be the start of something big.
SPACs Are Back
Another phenomenon from the last year was the resurgence in the use of so-called 'special purpose acquisition companies,' or SPACs. These public companies raise money for unspecified future acquisitions of private companies. It's a form of regulatory arbitrage, as it helps companies that want to go public avoid bureaucracy.
'SPACs are easier to get ramped up than an IPO,' professor
Again, the low costs of borrowing, combined with huge corporate stashes, are the driving force behind SPACs. Vast volumes of cash now languish in corporate bank accounts, and the people charged with looking after that money want to find a better return than the 0% that most deposit accounts offer. That situation makes SPACs attractive to investors.
It is also notable that the last time SPACs became investor darlings was in 2007, Evans said. That was near the end of the housing bubble, close to the top of the market, and was followed by a bear market.
'I see the SPACs spike here as something close to an indicator of a market top,' he said. 'We know that excessive IPO activity is an indicator of poor future returns.'
That thinking gets even more credence now that professional athletes have also started to get into the SPAC business, often a sign of bad things to come.
ESG Investing Finally Takes Center Stage
For years, investors have paid lip service to the principles of improved company performance regarding environmental, social and governance, or ESG, matters. Now, those matters are being brought to the forefront by investors and governments alike.
'The onus is now on the companies to expand on what they report,' he said. The largest investment companies - BlackRock, Vanguard and
In the future, investors will need to understand a new set of metrics that help gauge which companies are performing well in their ESG efforts and which are not.
'There will be challenges about what these new data mean,' Matos said. In turn, that will require savvy investors to go well beyond reviewing balance sheets and income statements.
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