Jul 24, 2021

What's New With Investing (2021)

All in all it has been a great year so far for the stock indices. The Dow just hit another record high and is up 14.56% so far this year. The S&P 500 is up almost 18%, and the NASDAQ almost 14%. IPOs and SPACs are grabbing headlines. Thanks in part to low mortgage rates and the pandemic creating supply shortages, housing prices surged. Bond yields have been quite variable. The biggest loser this year has been Bitcoin (and other crypto currencies), dropping to about half its peak price earlier this year. Let’s take a closer look at some of these trends. (We will save Crypto Currency for a separate post.)

 

Retail investing and Meme Stocks

 

A great article to read as way of background for this is one from yesterday’s reading list from Of Dollars And Data. It provides a history of investing, from its origins in preserving food, to the advent of the commenda in Venice in 1500 (using private equity to fund trading expeditions), to the Dutch East India Trading Company, founded in 1602. It goes on to explain that the need for retail investing didn’t really arise until life expectancy increased to the point where people lived long enough to need to put money away for the future. What follows is how personal investing changed over the last 100 years as it became easier to invest in a diversified portfolio. (Mutual Funds appeared in the 1920s, and then Index Funds in the 1970s.) It ends by predicting how technology will impact retail investing into the future.

 

With the growth of investment apps and trading commissions dropping to zero, more and more individual investors have jumped on investing in individual stocks. They tend to react to earnings announcements, particularly of smaller companies, by buying and bidding up the price of the stock, regardless of what actual information comes out in the announcement itself. The lasting impact on the stock price is amplified by social media hype around any event. This “breaks” the theoretical efficient market linkage between earnings and price.

 

Historically, large institutional investors with their sophisticated pricing models have dictated stock prices. Smaller and less sophisticated retail investors have had little or no influence on stock prices. “We’ve known for a while that retail investors perhaps disregard accounting information or at least fail to fully appreciate the valuation implications of it,” said Michels. “But what we’re seeing now more than ever is how this can move stock prices and move markets. You might think that in many cases the larger traders influence market prices. But the rise of the retail trader, and those trades coordinated through social media platforms, can really shift market prices.”

 

This sets us up for a bit more of a discussion of “Meme” stocks. In short, these are stocks that trade on hype, (or the desire to take down a hedge fund) not fundamentals. They are therefore risky.  We have all heard a lot about GameStop and AMC. While we don’t like to cite articles with “top ten” lists, this one from msn gives you some other meme stocks to be aware of if you want some new examples. And this Yahoo Finance article lists the ten biggest losers if you are looking to make a point about the risk. (There is some overlap.)

 

"These meme stocks usually gain prominence through internet platforms like Reddit and StockTwits. The WallStreetBets forum on Reddit, with more than 10.7 million members, is the most popular retail investor platform."

 

IPOs and SPACs

 

You can’t talk about investing in stocks without talking about IPOs (Initial Public Offerings), and recently, you can’t talk about IPOs without talking about SPACs (Special Purpose Acquisition Companies).

 

The Global IPO market had its strongest quarter and first half showing in over two decades so far this year, and the trend is expected to continue. (CNBC) The US IPO Market also had a strong first half, not only in terms of volume (213 companies), but in money raised ($70 billion) and the largest number raising over $1 billion. (CNBC2)

 

The SPAC boom in the last two years has also made headlines. Until 2020, this vehicle was not widely used to take a company public. What exactly are SPACs? They are public companies that have no commercial business. When they are formed, investors usually have no idea what sort of company they will be investing in. The money is invested in safe assets until a target is found. Then the SPAC merges with an existing private company that wants to go public, buying a share of the merged company using the cash it raised, and the target becomes a public company when the merger is completed. This is often a quicker, easier and cheaper way for a company to go public. If they don’t find a target within two years, the money is returned to the investors. Virgin Galactic and Draft Kings are two recent examples. (Investopedia, Motley Fool, graph below from Statista)

 

What has been happening in the Stock and Bond Markets?

 

If you read market round-ups daily, be prepared for motion sickness. (Here is the latest from Yahoo Finance if you are interested.) The stock market dropped quite a bit on Monday, 7/19 (reportedly due to Delta variant fears) but the Dow closed at another record high yesterday (7/23) following stronger indications of economic recovery. Just when you think the upward trend may be abating or turning, it isn’t. Remember that the real rate of return on alternative assets (namely bonds) is very low or negative. Investors seek out equities for a potentially bigger return.

 

The volatile bond markets seems to be defying predictions. The 10-year Treasury yield is sitting in the 1.2-1.3% range. It was as high as 1.75% earlier this year. (Remember that bond prices and yields move in opposite directions.) The drop in yield means that more are buying the bonds, bidding up the price. The expectation was that with economic recovery and higher inflation, the yields might stay higher. (CNBC)

 

It may help to frame this by looking at who is buying the Treasury Bonds. A key purchaser is the Federal Reserve Bank itself through what is known as “Quantitative Easing” or QE. (They are currently buying $80 billion of Treasuries and $40 billion of mortgage-backed securities each month.) Since the last Federal Open Market Committee Meeting (there will be another one next week), there has been talk about a potential backing off of QE if inflation prevails. If demand then drops for the bonds, so will prices and yields will go back up. (So too will mortgage rates.)

 

If you are looking for a safe investment with a positive real yield, don’t overlook good old savings bonds. The Series I (inflation) bonds currently pay 3.54%. You can buy up to $10,000 per person, per year. (NYT)

 

All in all it has been a great year so far for the stock indices. The Dow just hit another record high and is up 14.56% so far this year. The S&P 500 is up almost 18%, and the NASDAQ almost 14%. IPOs and SPACs are grabbing headlines. Thanks in part to low mortgage rates and the pandemic creating supply shortages, housing prices surged. Bond yields have been quite variable. The biggest loser this year has been Bitcoin (and other crypto currencies), dropping to about half its peak price earlier this year. Let’s take a closer look at some of these trends. (We will save Crypto Currency for a separate post.)

 

Retail investing and Meme Stocks

 

A great article to read as way of background for this is one from yesterday’s reading list from Of Dollars And Data. It provides a history of investing, from its origins in preserving food, to the advent of the commenda in Venice in 1500 (using private equity to fund trading expeditions), to the Dutch East India Trading Company, founded in 1602. It goes on to explain that the need for retail investing didn’t really arise until life expectancy increased to the point where people lived long enough to need to put money away for the future. What follows is how personal investing changed over the last 100 years as it became easier to invest in a diversified portfolio. (Mutual Funds appeared in the 1920s, and then Index Funds in the 1970s.) It ends by predicting how technology will impact retail investing into the future.

 

This Knowledge@Wharton podcast took a good look at retail investing recently, and ties in what has been happening with “meme stocks.” Specifically, this podcast interviews Jeremy Michels who wrote a paper that looks at how the influx of retail investors may have changed how stocks are priced. He examined data from Robinhood between May 2018 and August 2020.

 

With the growth of investment apps and trading commissions dropping to zero, more and more individual investors have jumped on investing in individual stocks. They tend to react to earnings announcements, particularly of smaller companies, by buying and bidding up the price of the stock, regardless of what actual information comes out in the announcement itself. The lasting impact on the stock price is amplified by social media hype around any event. This “breaks” the theoretical efficient market linkage between earnings and price.

 

Historically, large institutional investors with their sophisticated pricing models have dictated stock prices. Smaller and less sophisticated retail investors have had little or no influence on stock prices. “We’ve known for a while that retail investors perhaps disregard accounting information or at least fail to fully appreciate the valuation implications of it,” said Michels. “But what we’re seeing now more than ever is how this can move stock prices and move markets. You might think that in many cases the larger traders influence market prices. But the rise of the retail trader, and those trades coordinated through social media platforms, can really shift market prices.”

 

This sets us up for a bit more of a discussion of “Meme” stocks. In short, these are stocks that trade on hype, (or the desire to take down a hedge fund) not fundamentals. They are therefore very risky.

 

We have all heard a lot about GameStop and AMC. While we don’t like to cite articles with “top ten” lists, this one from msn gives you some other meme stocks to be aware of if you want some new examples. And this Yahoo Finance article lists the ten biggest losers if you are looking to make a point about the risk. (There is some overlap.)

 

These meme stocks usually gain prominence through internet platforms like Reddit and StockTwits. The WallStreetBets forum on Reddit, with more than 10.7 million members, is the most popular retail investor platform.

 

IPOs and SPACs

 

You can’t talk about investing in stocks without talking about IPOs (Initial Public Offerings), and recently, you can’t talk about IPOs without talking about SPACs (Special Purpose Acquisition Companies).

 

The Global IPO market had its strongest quarter and first half showing in over two decades so far this year, and the trend is expected to continue. (CNBC) The US IPO Market also had a strong first half, not only in terms of volume (213 companies), but in money raised ($70 billion) and the largest number raising over $1 billion. (CNBC2)

 

The SPAC boom in the last two years has also made headlines. Until 2020, this vehicle was not widely used to take a company public. What exactly are SPACs? They are public companies that have no commercial business. When they are formed, investors usually have no idea what sort of company they will be investing in. The money is invested in safe assets until a target is found. Then the SPAC merges with an existing private company that wants to go public, buying a share of the merged company using the cash it raised, and the target becomes a public company when the merger is completed. This is often a quicker, easier and cheaper way for a company to go public. If they don’t find a target within two years, the money is returned to the investors. Virgin Galactic and Draft Kings are two recent examples. (Investopedia, Motley Fool, graph below from Statista)

 

  

What has been happening in the Stock and Bond Markets?

 

If you read market round-ups daily, be prepared for motion sickness. (Here is the latest from Yahoo Finance if you are interested.) The stock market dropped quite a bit on Monday, 7/19 (reportedly due to Delta variant fears) but the Dow closed at another record high yesterday (7/23) following stronger indications of economic recovery. Just when you think the upward trend may be abating or turning, it isn’t. Remember that the real rate of return on alternative assets (namely bonds) is very low or negative. Investors seek out equities for a potentially bigger return.

 

The volatile bond markets seems to be defying predictions. The 10-year Treasury yield is sitting in the 1.2-1.3% range. It was as high as 1.75% earlier this year. (Remember that bond prices and yields move in opposite directions.) The drop in yield means that more are buying the bonds, bidding up the price. The expectation was that with economic recovery and higher inflation, the yields might stay higher. (CNBC)

 

It may help to frame this by looking at who is buying the Treasury Bonds. A key purchaser is the Federal Reserve Bank itself through what is known as “Quantitative Easing” or QE. (They are currently buying $80 billion of Treasuries and $40 billion of mortgage-backed securities each month.) Since the last Federal Open Market Committee Meeting (there will be another one next week), there has been talk about a potential backing off of QE if inflation prevails. If demand then drops for the bonds, so will prices and yields will go back up. (So too will mortgage rates.)

 

If you are looking for a safe investment with a positive real yield, don’t overlook good old savings bonds. The Series I (inflation) bonds currently pay 3.54%. You can buy up to $10,000 per person, per year. (NYT)

 

More to explore

 

If you are looking for some mind-blowing facts about markets, A Wealth of Common Sense pulled together an interesting list.

If you have an hour or three, there are some great NGPF on-demand PD opportunities available on investing if you want to spend a little more time brushing up on your knowledge.

 

 

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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