The COVID-19 pandemic has impacted the markets in unusual ways. Long-lasting trends suddenly stopped and even reversed, like the Australian economic expansion. While we can discuss the impact of the pandemic, it is more interesting to study the investors’ reaction to what followed.
For instance, investors flooded the stock market with strong interest even at valuations that make no sense. Such extremes were reached that will make 2020 as the most unusual year in the history of the stock market.
Stock Indices Made New All-Time Highs
Perhaps the most notable thing to mention is that during the pandemic, the global stock market capitalization exceeded $100 trillion for the first time in history. Many stock market indices made new all-time highs during the pandemic, with the Nasdaq 100 in the United States leading the way.
Truth be said, there were little or no alternatives for investors. Because of central banks around the world bond-buying programs, fixed-income yields remain depressed even on the long term. As such, investors took the risk to put their capital in the stock market.
So strong was the desire to speculate, rather than to invest, that some incredible headlines appeared. For instance, Hertz, the U.S. rental-car giant, filed for bankruptcy. However, it did not stop investors bidding for its stock price.
Another example is even more extreme – Nikola, an electric truck automaker. It reached tens of billions in valuation without even producing one single truck. Moreover, its founder, Trevor Milton, dumped $55 million worth of Nikola shares as part of a real estate deal. Who bought and why – these questions will remain unanswered at least for now.
Let us move on to Tesla. The high volatility levels on the stock attracted more speculators rather than investors. Its price gained over 600% in the year, reaching incredible valuations. For instance, compared to the listed German Mittelstand (i.e. Germany middle-sized companies), Tesla is worth more than the entire German index. Its market share is now even higher than Berkshire Hathaway. However, if we compare some data, it makes no sense. For example, Tesla’s TTM (Trailing Twelve Months) sales are $28 billion, while Berkshire Hathaway sold ten times more, $279 billion. Also, Berkshire has a free cash flow of $27 billion compared to only $1.8 billion Tesla has. And the list could continue.
The point here is that 2020 took everyone by surprise. What looked like a stock market catastrophe turned into a success story.
Will the story continue in 2021?