As unemployment skyrocketed and the global economy collapsed in the months following the start of the COVID-19 pandemic, a strange thing happened: Wall Street arose.

The stock market has hit record highs, relatively new asset classes such as cryptocurrencies have headed for the moon, and individual investors have had hedge fund managers in shock.

A lot has happened in the investment world, and some of the changes are likely to be here to stay, according to investment and asset management experts at the. University of Virginia Darden Business School.

Fed Fuels Wall Street Rally

A year after government shutdowns sent the we in free fall, the economy still had not fully recovered to its pre-pandemic level. Compare that with the stock market, which has broken record after record over the same period.

This dichotomy will no doubt leave some people confused, but it shouldn’t.

The economy and the stock market are not synonymous. They can behave in different ways and do so frequently. “The stock market is not an indicator of the economy as a whole, but rather of the health of state-owned enterprises,” said Professor Elena Lutskina. “The companies that were able to invest in the technology won the market. “

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Professor Darden, Elena Lutskina, explored the rise of the stock market during the pandemic, as many other areas of the economy were in free fall. (Photo provided)

Small and medium-sized retailers, however, have experienced a great deal of financial difficulty.

Another major factor that helped increase inventories was the ultra-low borrowing costs resulting from a drastic change in policy by the we Federal Reserve. Not only did the Fed cut short-term borrowing costs to near zero, it also flooded the banking system with liquidity by buying hundreds of billions of dollars in bonds.

In the end, it helped big companies.

The effect of cheap money and the gamification of investing

Cheap money rarely comes without unintended consequences. In this case, it appears to have resulted in what some would call the “Robinhood-GameStop effect”.

In early 2021, a group of individual – or retail – investors, who invested heavily using online broker Robinhood, coordinated through social media platforms like Reddit to buy shares in a games retailer. video under siege. GameStop. When stock prices recovered, hedge funds, which had bet on falling stock prices, suffered heavy losses. Strangely, hardly anyone thought GameStop had a viable future, but the rally was real enough to wipe out billions of dollars in Wall Street profits. So how did it go?

It comes down to the availability of cheap money, said Rodney Sullivan, executive director of the Richard A. Mayo Center for Asset Management in Darden.

“The low cost of capital drives a technology boom,” he said. At Wall Street, a large number of capital investment reduces the cost of investing more each year. For a long time, there has been downward pressure on transaction costs dating back to the founding of investment firm Vanguard, which introduced low-cost mutual funds in the 1970s. Now many brokers offer their customers exchanges at zero or near zero cost. And in general, this has been a good thing for investors – at least until the pandemic.

Zero-cost investing has led to what Sullivan calls the “gamification” of investing.

“Some people see it as a game and invest based on a hunch or what a friend says,” he said. It’s quite different from traditional investing, which involves the long-term process of extracting potential gains from the market.

Sullivan fears that the low costs will lure individuals into frequent transactions, and ultimately some naïve investors will suffer painful losses. “Gamification changes investment. He’s here to stay and it’s dangerous, ”he said.

Blockchain goes beyond Bitcoin, unleashes NFTs

Low investment costs have also contributed to the rise of cryptocurrencies, such as Bitcoin. By mid-April, Bitcoin prices had risen to $ 60,000, against less than $ 7,000 one year earlier. Low interest rates were behind at least part of this recovery, as investors sought alternative investments to cash. But the abundance of new technology in the form of electronic trading systems has also helped boost cryptocurrencies and similar assets.

“Will we have crypto if we don’t have the technology? Probably not, ”Sullivan said. All cryptos rely on technology for their existence and they need it to be traded.

Likewise, non-fungible tokens, or NFTs, use blockchain technology, just like Bitcoin and other emerging cryptocurrencies. The encryption provided by the blockchain means that people cannot reproduce these discrete and individually identifiable electronic elements: an NFT is not the same as another NFT. This differentiates them from cryptocurrencies, which are interchangeable (fungible) for each other.

And they can be sold for big money.

New York Times Columnist Kevin roose transformed an electronic copy of his column on the rise of NFT (“Buy this column on the blockchain!”) into NFT and sold it for $ 560,000. (The profits were then donated to charity, according to the columnist.)

Christie’s first auctioned an NFT in March, a digital photo collage by the artist known as Beeple that sold for $ 69 million. NFT-focused startup Dapper Laboratories raised $ 305 million a crowd of celebrities ranging from the great basketball player Michael jordan to the actor Will smith, valuing the company to $ 2.6 billion, after Dapper’s NBA Top Shot platform made waves with $ 500 million in sales of collectible “moments” – short video clips of highlights of NBA players.

Just as technology has revolutionized the way we use banking, it looks like it can change the way we invest in unique items, such as art and sports collectibles. In other words, NFTs can be the start of something big.

PSPC are back

Another phenomenon of the past year has been the resurgence of the use of so-called “special purpose acquisition companies” or SPACs. These public companies raise funds for future unspecified acquisitions of private companies. It is a form of regulatory arbitrage because it helps companies that want to go public to avoid bureaucracy.

“PSPCs are easier to set up than an IPO”, professor Rich evans mentionned.

Again, low borrowing costs, combined with huge corporate reserves, are the driving force behind SPAC. Vast volumes of money are now languishing in corporate bank accounts, and those responsible for looking after that money want a better return than the 0% offered by most deposit accounts. This situation makes after-sales services attractive to investors.

It’s also worth noting that the last time SPACs became investor darlings was in 2007, Evans said. This was towards the end of the housing bubble, near the top of the market, and was followed by a bear market.

“I see the SPAC peak here as something close to an indicator of a market peak,” he said. “We know that excessive IPO activity is an indicator of poor future performance.”

This thinking is even more credible now that professional athletes have also started to engage in PSPC activity, often a sign of bad things to come.

ESG investing finally takes center stage

For years, investors have been lip service to the principles of improving corporate environmental, social and governance, or ESG performance. Today, these issues are brought to the fore by investors and governments.

The Securities and Exchange Commission will now require detailed reports on these issues, Professor Pedro Matos mentionned.

“It is now up to companies to develop what they bring in,” he said. The largest investment firms – BlackRock, Vanguard and State Street – all pledged to use their influence with companies to get companies to disclose information and act as a positive force for society.

Going forward, investors will need to understand a new set of metrics that will help assess which companies are doing well in their ESG efforts and which are not.

“There will be challenges over the meaning of this new data,” said Matos. In turn, this will require savvy investors to go far beyond reviewing balance sheets and income statements.

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Darden Business School

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