New records for stocks and bitcoin – but where do we go from here?

About a year ago, COVID-19 hit the financial markets and caused a massive crash. Investors fled in droves from almost all asset classes, panic took over the regime on the stock market. Just 12 months later, the financial market is in extraordinary shape – but the crisis has also significantly changed investor behavior.

The year 2020 will go down in history as a historic year – also and in particular as far as the stock market is concerned. Where do the markets stand roughly one year after the crash? Which asset classes have been hit particularly hard and where are there even crisis beneficiaries?

Stock market hit hard – but the crisis didn’t last long

Stock marketThe best way to see how the Corona pandemic caused a stir on the stock market is to look at the development of share prices. In December 2019, news about a new virus called COVID-19 entered the consciousness of many people. But it would be almost three months before stock markets reacted to the threat: The crisis arrived belatedly in financial markets.

Massive, unmistakable consequences were felt on the German stock market on March 18, 2020 – on that day, the leading German index, the DAX, plummeted to 8,442 points; about a month earlier, the stock market barometer had still stood at around 13,800 points. Within three weeks, the index lost around 40 percent, investors reacted in panic and withdrew their money from shares across the board.

Similar developments were seen not only in Germany, but also on stock exchanges around the world. On March 20, the leading U.S. Dow Jones index fell to 18,592 points, compared with 29,348 points around a month earlier.

The crisis had arrived, but it did not last long – investors who held their nerve and did not liquidate all their stock investments head over heels were rewarded for their courage. Those who even took advantage of the situation to buy additional shares profited all the more, because the recovery was not long in coming. In the weeks that followed, the markets began a recovery rally that even experts had not expected. By the end of the year, the German stock exchanges were back at pre-crisis levels, while the U.S. markets managed to do so even earlier. This was despite the fact that many statisticians had previously pointed out, with reference to past crises, that it would probably take around two years for the stock markets to return to their pre-crisis levels.

And the markets not only recovered the losses from the Corona crash within a short period of time, but most of them even set new records. The DAX shot up to 14,804 points in mid-March, a figure 75 percent higher than the index level of around a year ago. The Dow Jones also reached unprecedented heights at 33,228 points on March 19, up 69 percent from the crisis level in the midst of the Corona pandemic in March 2020.

There were a few reasons for the market’s quick recovery. Lockdown measures around the world have robbed people of their recreational options. With amusement parks, cinemas or casinos closed and travel drastically restricted, an extraordinary situation arose: many people around the world – although the crisis also hit hard on the labor market – suddenly had more money available that they had invested in their hobbies and leisure time before the pandemic. In addition, there was a flood of money from the central banks, which ensured a continuation of the low interest rate environment, and there were also massive economic stimulus programs, accompanied in the USA, for example, by stimulus checks to boost consumption. Low interest rates on bank accounts, a bond market that yielded nothing, combined with money that could not be invested in leisure activities, led to a run on the stock market – numerous people invested in stocks for the first time since the Corona pandemic.

A new class of investor emerged – the Deutsches Aktieninstitut identified in particular the group of under-30s in Germany who were particularly active in the stock market in the Corona year. This became apparent at the end of January, when a flood of small investors who had colluded via the Reddit sub-forum r/WallStreetBets caused a furor on the markets and even put established hedge funds in financial distress with their short strategies. Many of the users, who frequently resorted to trading apps such as Robinhood, had become active on the stock market “uninformed,” a recent study found. Much of the movement was new to the stock market, noted researchers Gregory Eaton and Brian Roseman of Oklahoma State University, along with T. Clifton Green and Yanbin Wu of Emory University.

Not all shares benefit equally

sharesBut the flood of new shareholders and the policies of central banks combined with extensive economic stimulus programs in countries are not the only reasons for the stock market boom that followed the crash quarter of 2020. This becomes clear when one takes a look at the stocks that mainly benefited from or were responsible for the upswing. This is because the recovery – just like the preceding bull market – was driven in particular by tech stocks. Particular attention was paid to companies whose business models were among the beneficiaries of the Corona crisis: Cloud providers, for example, or streaming companies, as well as providers of online courses or software or portals with online services, Internet retailers, providers of video conferencing systems, ect. Pharmaceutical stocks and biotech companies were also among the most popular investment segments in the market.

These companies drove the V-shaped recovery in the stock market, while cyclically sensitive sectors such as the tourism segment, airlines and also retailers significantly underperformed the markets during this period. The automotive sector also felt the crisis on a massive scale, due in particular to the shortage of semiconductors. Meanwhile, electric car manufacturers such as Tesla bucked the trend and not only reached unimagined record highs, but also played a decisive role in driving market development in the tech sector.

But this fact that not all sectors have shared equally in the recovery could point to a continuation of the stock rally. After all, as vaccination penetration among the population increases, lockdown measures will be softened more and more and eventually suspended completely. Travel providers and airlines, but also retailers, will then have enormous catch-up potential; the losers of the lockdowns could become the winners of tomorrow.

At the same time, the high-flyers of the past few months are still worth a look, because the Corona crisis may have brought about a long-term change in the digitalization of the world of work, schools, and online retail, so that companies from these sectors are likely to continue to show strong business development in the future.

In addition, the monetary policy of central banks is unlikely to change in the near future, and the low interest rate environment is expected to continue worldwide for some time, which keeps equities attractive from an investor’s perspective.

Crisis takes cryptocurrencies decisive step forward

cryptocurrenciesNot only have stocks received a new boost after the Corona Crash quarter of 2020, the cryptocurrency market has seen a particularly significant upturn in the following months. As a result of the panic on the market, the world’s largest cryptocurrency Bitcoin, for example, fell to 5,402 U.S. dollars in March, plummeting by around 40 percent within a month. The altcoin market had also a difficult time.

However, analogous to the stock market, digital currencies also began to recover after the crash, albeit later. On the other hand, the recovery was much more rapid than in the case of equities as an asset class. At its peak, the largest sector representative BTC went up to 61,254 U.S. dollars and even currently bitcoin is traded around 900 percent above its crisis low. All cryptocurrencies together have now reached a market value of over one trillion dollars.

This is because the oldest cryptocurrency, Bitcoin, in particular, was increasingly given “safe haven” status in the months following the crisis. Many investors were betting on BTC as a potential payment medium of the future. The fact that companies like Tesla made investments in the cryptocoin but also the increasing market penetration brought Bitcoin to the top of the shopping lists of many market participants.

In fact, the rapid rally on the cryptocurrency market, which drove Bitcoin & Co. to ever new record highs, is also accompanied by increasingly cautionary voices. However, the fear of a bubble does not seem to have reached the broad market yet, because this year alone, Bitcoin has gained 85 percent, and that despite the fact that the digital currency already cost many times more at the start of the year than what investors had to put on the table for a coin in the midst of the Corona crash last year.

As far as the potential further price development of Bitcoin is concerned, the experts’ estimates are clearly ambivalent: from six-figure price forecasts to predictions of a complete crash, everything is possible; cryptocurrencies divide opinions.

Nevertheless, at least in the short to medium term, interest in the crypto market in general and Bitcoin in particular is not expected to wane. Public interest remains high and as the market for Bitcoin as a means of payment opens up, market penetration is likely to increase further. The macro environment remains intact as long as inflation worries continue to plague many investors and, moreover, the FOMO effect does not lose its luster.