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U.S. Stocks End a Wild Year With Big Gains

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U.S. stocks are heading for a third consecutive year of strong gains, with major indices nearing all-time highs for the end of 2021.

Even with the recent turmoil in the Omicron coronavirus variant, the S&P 500 is heading for a 28% lead for 2021 and has hit 70 highs. This is the third consecutive year of double-digit gains for the broad index, and the second amid the Covid-19 pandemic. The Dow Jones Industrial Average and the Nasdaq Composite have gained 19% and 22%, respectively, this year, helping the major indices achieve their best three-year performance since 1999.

Some traders are noting that warning signs are flashing: Inflation could wreak havoc on business and customer finances. Many companies that have been the darlings of the market are losing money. Big name stocks continue to experience giant swings of a day. However, individual traders and institutional investors are eager to take on greater risk and are prepared to accept bouts of volatility.

The year started off with a stunning start: Day traders who nosed around stocks at the start of the pandemic invested money in meme stocks such as GameStop. Corp.

, disrupting the power dynamic by which professional investors are generally the king of the market. Fund managers say this year more than ever they are closely monitoring where individual investors are putting their money and monitoring their trading activity for clues about market movements.

The recent rise in the value of Shiba Inu Coin and the ensuing drop in value is part of a growing trend for coins even rivaling some of the largest digital tokens in the world. WSJ retail investment reporter Caitlin McCabe explains why investors are investing money in this memes-based cryptocurrency. Photo: Amber Bragdon / Getty Images

Cryptocurrencies have entered the mainstream more, aided by influencers like Elon Musk and the beginnings of the first bitcoin exchange-traded fund. Crypto prices skyrocketed, then fell, then climbed again. The market for non-fungible tokens has exploded.

The companies got their start in the public markets with skyrocketing valuations. Business executives rushed to profit from steep stock market, with companies from Norwegian Cruise Line Holdings Ltd.

at AMC Entertainment Holdings Inc.

issue more shares to raise funds.

Commerce has buried itself deeper into pop culture. Newbie investors placed what are known as YOLO (β€œyou only live once”) trades, or big risky stock bets, and shared screenshots of their wins and losses on social media .

β€œWhen you see your friends making a ton of money in the market, everyone is going for it,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.

Still, the equity market rally has been anything but calm. GameStop stocks collapsed in January, driven by a social media frenzy, and individual stocks continued to rock throughout the year.

Even at the end of the year, actions including Avis Budget Group Inc.

and acquisition of the digital world Corp.

, a company linked to former President Donald Trump, was experiencing giant fluctuations of a day.

Fireworks weren’t limited to memes stocks. The market values ​​of S&P 500 stocks have jumped or fallen at a rate approaching the first days of panic and volatility of the Covid-19 pandemic, according to analysts at Bank of America Corp. Even some of the largest companies in the United States have made gigantic moves, in some cases winning or losing tens of billions of dollars in market value within days. This includes Tesla Inc.,

which gained nearly $ 200 billion in market value in four days at the end of December, more than the equivalent of Ford Motor Co.

and General Motors Co.

combined.

“We’ve never seen anything like it in history,” said Dean Curnutt, managing director of brokerage firm Macro Risk Advisors, referring to the volatility of certain stocks. “The crashes were huge.”

Figures from Macro Risk Advisors show stocks like GameStop, AMC, Tesla and Nvidia Corp.

were more volatile on days when stocks rose than when they fell, upsetting typical market dynamics.

“Who said it’s the escalator up, the elevator down for inventory?” Mr. Curnutt wrote in a note to clients.

These moves have drawn many investors, both institutional and individual, to options, a shift that can make the market vulnerable to larger swings, some traders said. Options trading activity, which gives traders the right to buy or sell stocks at a specific price on a given date, reached the highest level in industry history with data dating back to 1973.

Options trading, which can be riskier than stock trading, is on track to overtake stock market activity for the full year for the first time, according to one measure, according to data from Cboe Global Markets at 28 December. In 2021, the average daily notional value of traded stock options exceeded $ 467 billion, compared to about $ 410 billion in shares. Notional value measures the value of the stocks underlying the option contracts. The figure fluctuates with the daily movements of the stocks.

Traders poured amounts of money into options on a handful of high-tech stocks, with Tesla being an overwhelming favorite. Traders have spent more than $ 670 billion on Tesla-related options, in what is known as the premium, according to Cboe data. That’s more than what they spent on Amazon.com Inc.,

Apple Inc.,

Nvidia and Invesco QQQ Trust have merged.

The first public offerings and specialized acquisition companies, known as SAVS, broke record after record. As of last week, PSPCs raised $ 162 billion in 2021, more than what they raised in the previous decade combined, according to Dealogic. Many of them are not profitable; About 70% of companies that went public through traditional IPOs lost money, a higher proportion than even during the tech bubble of the 1990s, according to Bank of America figures from November.

β€œIt was the year of the risky asset,” said Shanta Puchtler, president of investment firm Man Group, which oversees around $ 140 billion in assets. β€œWherever there was risk and an opportunity for greater returns, we saw it pay off a lot. “

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The heavy speculation has left some investors wondering if the markets are in a giant bubble, although some of the excitement has started to fade. Near-zero interest rates and central bank interventions in the event of a pandemic have been key support for stock markets for almost two years now. The Federal Reserve signaled this month that it was ready to hike rates next year and cut its bond buying program at a faster pace. When rates rise, investors have more options to park their money for a gain and may become less willing to take risks.

Investors have also had to contend with an important factor that they have mostly ignored over the past decade: inflation. U.S. inflation hit a nearly four-decade high last month, raising questions about how many price hikes Americans can absorb. The emergence of the Omicron variant has rocked U.S. stocks since Thanksgiving.

Shares of exchange-traded fund ARK Innovation, PSPCs and several memes stocks fell from their early-year highs. More than 300 unprofitable companies have fallen more than 50% from recent highs and many stocks have not participated in the rise of the broader market in recent months. Many companies that debuted on the stock exchange this year are now trading below IPO prices.

“Some of these bubbles have practically burst,” said SΓ©bastien Page, head of global multi-assets at T. Rowe Price.,

which oversees approximately $ 468 billion in assets. β€œWe have become more careful. “

2021 has been a crazy year. As the coronavirus still casts a lot of uncertainty over the future of travel, Rivian and Lucid are rocking the auto industry, and Branson, Bezos and Musk are launching all of their space tourism programs. But what does 2022 have in store? George Downs of the WSJ takes a look at some of the key events that could make the headlines next year.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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