All In?

It’s almost a year on from 2020’s stock market rout, and share prices have been rising pretty steadily ever since. Until last week, that is, when a slight drop had major consequences for overconfident investors betting on the riskiest markets…

 

🕰 Recap

  • Tesla’s stock rose almost 800% last year, culminating in its addition to the S&P 500 index.
  • US stock markets closed last year around 15% higher than they began, despite falling more than 20% at the height of the pandemic.
  • Special-purpose acquisition companies (SPACs) raised record amounts last year, and that momentum’s continued into 2021.
  • And this year, cryptocurrencies have made a resurgence, with bitcoin’s price hitting record highs.

 

✍️ Connecting The Dots

Stock prices have, on average, risen indiscriminately since last March’s mega stock market selloff, which has made it easy for investors to profit no matter what they bought. Risky stocks like Tesla’s have gone from cult following to mainstream inclusion in the US’s key stock market index. Throw in the ongoing SPAC boom and the recent resurgence of cryptocurrencies, and it’s easy to see why investors – particularly new ones – might be expecting things to keep going up and up.

But there have been signs investors are optimistic about stocks without good reason. GameStop’s stock, for example, jumped 10% after infamous Reddit user Roaring Kitty said earlier this month that he was still invested in the company. And at the same time, long-term US government bond yields have been rising, making some of the most expensive stocks look less attractive. Both those occurrences suggest now’s not a great time for overoptimistic investors to take even more risk: we all know what happens when you fly too close to the sun, after all…

So if your stock portfolio’s down, say, 10% or more in a week where the S&P 500 has dropped about 2.5% and the Dow Jones Industrial Average has barely moved, you’ve probably taken on more risk than average for the stock market. If that’s the case, you might want to think about diluting the effect of such big moves by diversifying into more stable companies – or else risk nervously checking on your investments day after day.

 

🥡 Takeaways

1. Another way to dilute the risk of big moves: look at the beta.

Volatile stocks – which tend to rise more than the wider market in good times and fall more in bad times – have high “beta”. Beta isn’t the only thing that determines why or how much a stock’s price might fall by, but consider it an important tool in your arsenal for assessing which might. Take Tesla: its beta is 2.09, meaning you’d expect Tesla to climb 20.9% when the US market as a whole rises 10%. On the flip side, when the market drops 10%, you’d expect Tesla to fall 20.9%. You can easily find beta for a stock listed in the statistics tab of Yahoo Finance.

2. Investors are all about growth, growth, growth.

If investment bank UBS is to be believed, investors are all after one thing: companies with high earnings growth. In the near term, cheap-looking “value” stocks might fit the bill: their earnings growth is set to rebound from last year’s lows. But in the longer term, those cheap valuations will matter less if they’re not backed by high earnings growth, and “growth” stocks should – as their name suggests – reclaim the number one spot.

 

🎯 Also On Our Radar

Some naysayers might’ve eaten their words late last week when controversial electric vehicle maker Nikola announced a smaller quarterly loss than analysts were predicting. The company’s yet to generate any revenue, but that didn’t stop investors from initially sending its shares up – though they quickly sent them back down.

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