Year Ends With Record High

The stock market ended 2020 at a record high as the S&P 500 rose 64 basis points. Tesla was up 1.57% to a new record. This was the stock of the year. It now has a $669 billion market cap. Investors highly doubt it will have a great 2021. It may even crash and burn soon. The table below shows the maximum drawdowns in the S&P 500 each year. The market had the highest drawdown ever in a year where it increased.

The S&P 500 rose 16.26% in 2020. It was a moderately better year than average which is impressive given the recession and deadly pandemic. That's not predicting doom and gloom for the market because some think there will be a sector rotation. 

If the energy and bank stocks rally sharply, we could avoid a massive blow up. That being said, anticipated 5% losses in the S&P 500 and 15% losses in the Nasdaq would crush some speculators since the software names will underperform. 

That might be overemphasizing the difference between the Nasdaq and the S&P 500. After all, the S&P 500 was also driven by FAMNG. 57% of the S&P 500’s returns were driven by Apple, Microsoft, and Amazon. Tesla is going to have a huge impact on the index one way or the other in 2021.

(Click on image to enlarge)

Some Software Stocks Are Already Down A Lot

As you can see from the chart below, 33 stocks in the Nasdaq 100 had 50% returns or more this year which is 1/3^rd of the index. That’s the most since 2013 when 34 firms were up 50% or more. Given all the amazing data that shows this is the most speculative market since the late 1990s, 

Some investors are slightly disappointed we didn’t beat the 2013 level (the Nasdaq 100 rose 37% in 2013 which was much less than this year’s gain of 47.6%).

(Click on image to enlarge)

There has recently been a decline in some of the software stocks as investors realize the work from home trend was temporary and that fewer people will shop online when stores are fully reopened and you don’t need to wear masks to go in them. Specifically, Zoom stock was down 4.6% on Thursday, putting it down 40.7% since its peak in October. 

When Zoom was rallying, this is a conduit for macro bets. No one cared about its valuation when they were buying it in the spring and the summer. When it crashes further in 2021, no one will care if some people/businesses stick with their subscriptions. Don’t fight the trend. Zoom is still up 33% in the past 6 months. Some won’t invest in it until it falls another 50%.

Shopify is on the same path as Zoom, although it has fallen much less. Shopify fell 2.7% on Thursday and is down 11.4% since December 22^nd. You would think fund managers would want to show ownership of it, but maybe they closed their books before the end of the year. 

You would also think retail investors would try to avoid paying capital gains taxes in 2020. We can expect some selling next week when 2021 starts. We might even see selling in March when 1 year passes on people’s gains. The long term capital gains tax rate (after 1 year) is much lower than the short term one.

Stocks Beat Bonds

The total performance of the stock market beat the bond market in 2020 as you can see from the chart below. The S&P 500’s total return was 17.6% which was above treasuries’ gain of 17.3%. The 10-year yield ended the year at 91.9 basis points which was just below my target of 1%. It will likely hit 1.5% next year if the vaccines get distributed properly by the next administration.

(Click on image to enlarge)

As of the end of 2020, 3 million initial vaccine doses were given out which missed the target of 20 million in December. This has had no noticeable impact on hospitalizations. We are going to be done with this pandemic pretty soon because so many people are testing positive. 

We’d rather get to herd immunity via the vaccines, but the spread is unfortunately helping. We can expect life to begin to get back to normal in February because by then most elderly people will have gotten the vaccine. Fans will definitely be in attendance at the Super Bowl.

Extreme Speculation

Just because there weren’t more huge winners in the Nasdaq 100 than in 2013, doesn’t mean this wasn’t a euphoric year. We saw a huge amount of speculation in ETFs. As you can see from the chart below, there were 95 ETFs with gains of over 50% which was above the peak in 2009. 

There weren’t many ETFs in the years before this graph. There is no way of comparing this year to 1999 based on this metric. This chart also shows there were 21 ETFs that rose over 100%.

(Click on image to enlarge)

Speculative Sentiment

On financial Twitter, there are tons of accounts boasting about triple-digit gains in 2020. We are in a euphoric state for software stocks and other growth names. Even after its 35.9% decline recently, Beyond Meat is still up 65.3% year to date.

(Click on image to enlarge)

The year ended with 46.1% bulls and 26.8% bears in the AAII investor sentiment survey. As you can see from the chart above, the average weekly bearish sentiment this year was 38.8%. The historical average is 26.8%. This year had the longest streak of bearish sentiment above 50% ever. 

When the AAII survey turned bullish, the stock market didn’t crash like some expected. Finally, the NAAIM fund manager exposure index fell from 89.11 to 82.97. It has been above 80 since the vaccine data came out.

Conclusion

The stock market had its largest drawdown in a positive year ever. There is intense positive euphoria among retail investors who discovered options for the first time. There will be a ton of blame cast at Robinhood when the speculative bubble ends because they enabled/encouraged people to risk their money. 

Ironically, Robinhood is set to go public in a few weeks. Their stock probably won’t do well in the long run because the retail bubble is close to popping.