The financial markets climbed a wall of worry through 2021, as investors drove up asset prices in the face of persistently high inflation, a global supply chain crisis and one of the most frenzied speculative booms in decades.
Shares rallied to record levels as money poured into stocks, deal-making soared and the gamification of investing hit new heights. Here are some of the biggest moments from a rollercoaster year.
Meme stock mayhem
The year’s drama began on Wall Street, where groups of retail traders teamed up through online forums to attempt one of the biggest short squeezes in market history.
Organised through Reddit’s Wall Street Bets group, they homed in on beaten-down stocks that hedge funds had shorted (by selling borrowed stock, planning to buy it back cheaper in future).
In a frenzy that gripped Wall Street, the WSB army used two weapons to cut down the hedgies: call options – derivatives that gave the right to buy shares at a certain price – and memes, to fuel their orchestrated buying, as they tapped into public distaste for predatory speculators.
The phenomenon started with GameStop, the US video game retailer, driving its share price up an astonishing 1,700% in a month, and briefly causing the markets to wobble as hedge funds ran up huge losses trying to buy borrowed stock back.
But this squeeze was dramatically, and controversially, punctured after trading app Robinhood curbed share buying. It blamed demands from its clearing houses; r/wallstreetbets cried foul, although a lawsuit claiming a conspiracy with market-maker Citadel Securities was thrown out last month.
The saga resulted in a new vocabulary entering the markets, with “diamond-handed” traders refusing to fold their positions, and others crying “yolo” (you only live once) as they embarked on risky but potentially lucrative trades.
This GameStop frenzy was repeated with the cinema group AMC, the retail chain Bed Bath & Beyond and the car rental group Avis, flaring up several times in the year.
These rallies ended in tears for some retail traders, who were left holding the bag as the meme stocks dropped back. But despite a tumble in late December, GameStop is still up 700% this year, with AMC about 1,200% higher.
Special purpose acquisition companies (Spacs) – created to buy other, as yet unknown companies – also boomed early in the year, before fizzling out as some performed badly. By December a fund that tracked Spacs was down more than 20% for the year, while the S&P 500 was up more than a quarter.
This speculative fever was fuelled by a lot of money sloshing around the system, thanks to record low interest rates and pandemic stimulus programmes.
“The big theme remains how the price of all financial assets remains grossly inflated both on a relative and outright basis,” says Bill Blain, a strategist at Shard Capital.
Central bankers continued their ultra-loose monetary policy through 2021, repeatedly soothing the markets that rising prices would be temporary. America’s Federal Reserve kept buying $120bn (£89bn) of bonds each month, but finally started to taper the programme in November as inflation hit its highest level in decades.
This “monetary distortion” has warped the way people think about capitalist free markets, Blain argues. “Distorted financial asset prices create all kinds of unintended consequences – from stalling the normal ‘business cycle’ by allowing obsolete zombie companies to survive, stifling and distorting business evolution, to facilitating the misdirection of capital within the economy.”
Or, as the Wall Street Bets crowd put it, “money printer go brrr”.
These massive distortions were most evident in the cryptocurrency market, where the combined value of bitcoin, ethereum and newer entrants such as solano reached $3tn in the summer, before prices chilled later in the year.
Crypto did hit some key milestones – El Salvador became the first country to make bitcoin legal tender, in a launch marred by technical glitches – but there were also several jolting crashes, including a Chinese crackdown on bitcoin mining. After hitting record highs of about $69,000, bitcoin ends the year below $50,000, up 64% for the year.
Supply chain shocks
Supply chain problems gripped the global economy, with big consequences for commodity stocks. Covid disruption to trade networks and factory production was exacerbated after the Ever Given container ship became wedged in the Suez canal in March.
While iron ore and copper experienced volatility, lumber prices really stood out. They surged in the first half of 2021, jumping 400% to a peak of $1,700 per thousand board feet in May amid short supplies. But prices then tumbled as builders put construction projects on ice. Agricultural inflation hit people in the pocket, too. Global food prices reached 10-year highs, with corn and wheat up 20%, and arabica coffee bean prices gaining 80%.
Had investors known on 1 January that US inflation would reach 6.8%, a 39-year high, by November, they would have be forgiven for investing in gold. But the traditional hedge against inflations had its worst year since 2015, losing about 4% and lagging behind many other assets.
Inflation also affected fixed-income assets, with global bond markets on course for their worst year since 1999.
Overall, the UK’s FTSE 100 had a solid year, gaining about 14%. Wall Street saw strong gains, with the Nasdaq Composite up 21% and the broad S&P 500 index surging 28% over the year, including a remarkable 70 record highs.
Big tech grew ever more powerful, with Apple, Google, Microsoft, Nvidia and Tesla accounting for more than a third of the S&P 500’s returns this year.
But smaller, less profitable tech stocks tumbled, as their pandemic sales growth slowed and the US Federal Reserve moved towards raising interest rates next year, dampening their appeal as growth stocks.
An index of unprofitable US tech stocks created by Goldman Sachs was pummelled in November. By the end of the year, the bull market in tech IPOs has turned into a bear, with most US tech floats at least 20% off their highest point.
Video-conferencing operator Zoom fell by 45% during the year, while Peloton flopped 75% close to its pre-pandemic lows, dragged down by a reluctant cameo in Sex and the City.
“At the outer extreme, stocks that wouldn’t have looked out of place in the tech bubble of 2000/2001 are 60% lower on average than earlier in the year,” points out David Miller, the Quilter Cheviot investment director.
“Chinese technology companies are down a similar amount, but for different reasons. The growth-to-value rotation still being trotted out by one-trick-pony strategists looks like it might already have happened.”
Beijing gave the markets several scares, with the indebted property group Evergrande threatening to cause a messy collapse, and jolt the Chinese economy.
In the summer, President Xi Jinping launched a crackdown on technology companies, sending shares in overseas-listed companies such as ride-hailing service Didi plunging. Curbs on the education sector, and tighter controls on children playing video games, also rattled some stocks.
It was a record year for global merger and acquisition (M&A) activity, with stacks of capital and sky-high valuations leading to a whirl of deal-making. The value of M&A globally topped $5tn for the first time ever, according to Dealogic data, beating the record of $4.42tn set in 2007, before the financial crisis.
But the veteran investor Charlie Munger had a word of caution this month. Munger, 97, told a conference that the markets are wildly overvalued in places, warning that “I consider this era an even crazier era than the dotcom era.”