Five Investment Trends That Skyrocketed in 2020

Stocks soared in 2020. After plunging into a bear market—defined as a drop of at least 20%—a new bull market emerged, one that raced to new highs faster than ever before. The S&P 500 climbed 16.3% to end the year at a record, while the Nasdaq Composite gained 44%, its best year since 2009. The Russell 2000 small-cap stock index has roughly doubled from its March low.

The pandemic “put the U.S. economy and markets on the biggest bust-to-boom roller coaster we’ve seen,” said

Jim Paulsen,

chief investment strategist at the Leuthold Group. “It caused people to dump far more when it was collapsing—has caused them to chase assets on the way up.”

Here are five investment trends that boomed in 2020, defying many market watchers’ expectations. Whether these continue may decide much about the investing world in 2021.

The Momentum Trade

Under the surface, many individual stocks logged even more astronomical gains than the broader market. More stocks gained at least 400% at their yearly peaks in 2020 than in any year since 2002, according to a Dow Jones Market Data analysis of FactSet data, which looked at companies with a market value of at least $100 million.

Among those are

Tesla Inc.,

the electric car maker that soared more than 700% and made its way into the S&P 500,

Overstock.com Inc.,

NIO Inc.,

Peloton Interactive Inc.

and biotechnology firms.

Many retail and institutional investors turned to the momentum trade, or buying shares of companies that have risen sharply while dumping the relative losers. About $21 billion was recently sitting in exchange-traded funds tracking momentum, FactSet data show, the most in at least a decade.

“Higher stock prices show certain companies to be winners, attracting more people to do the same thing,” said

Tobias Hekster,

co-chief investment officer at True Partner Capital. “When herds start to agree with certain talking points and that starts to be reflected in the valuation, it can become a self-fulfilling prophecy.”

Of course, some investors say it is more than just excitement, calling the current environment a bubble. Among those is

David Einhorn,

who pointed to exuberance in the market for initial public offerings and soaring volumes in speculative bets like options in a third-quarter update for investors in his hedge fund Greenlight Capital.

“There are many anecdotes for toppy behavior. We will share one: We recently received a job application with the email subject, ‘I am young, but good at investments’ from a 13-year-old who purports to have quadrupled his money since February,” Mr. Einhorn wrote in the update, which was viewed by The Wall Street Journal.

Options Boom

Investors aren’t just looking to profit from the rising stock market. They are magnifying investments through options, contracts giving investors the right to buy or sell stocks later in time at specific prices. The market for stock options, which suffered years of flatlining volumes, roared to life as investors piled in. The sector, often thought to be the domain of sophisticated derivatives experts, became a playground for investors young and old, amateur and skilled.

Options volumes jumped to the highest level on record, according to Options Clearing Corp. data going back to 1973, with roughly 30 million contracts a day changing hands, up from around 19 million in 2019. Investors looked to bet on moves up and down in stocks and indexes, often cashing out of positions within hours or days to pocket profits.

Investors have often turned to options this year to bet on the stock market’s wild moves—both up and down. The contracts allow investors to put down a relatively small sum to wager on the stock market’s direction. Of course, losses can add up if an investor’s hunch is wrong, and riskier plays can burn an even bigger hole in an investor’s portfolio.

In one sign of the optimism permeating markets, bullish call options—those that give investors the right to buy shares later in time—flourished, as investors looked to profit from stocks’ ascent.

Bets on growth stocks like Tesla and

Apple Inc.

have been among the most popular in the entire market. At times, investors said the heavy derivatives activity drove big moves in the stock market itself, a sign of its growing influence on stocks. To some, the activity is a sign that investors are more comfortable taking risks than they were in the past, especially with bond yields falling lower and lower.

“All of this is driven by this Federal Reserve, zero-interest rate, [quantitative easing] world where people are forced to stretch and contort their positioning in the market to extremes,” said

Cem Karsan,

a senior managing partner at volatility hedge fund Aegea Capital Management. “This is a market built on…. very high leverage.”

SPACs

Few investments benefited as much as special purpose acquisition companies, shell companies designed to raise money first and pinpoint businesses to acquire later.

More than 200 SPACs came to market in 2020, raising roughly $74 billion, more than quintuple the amount in 2019 and a record, according to S&P Global data as of Dec. 17.

“Investors are firmly in a growth mind-set and SPAC sponsors targeting purchases in growth industries have had success raising capital,”

Goldman Sachs Group Inc.

analysts wrote to clients in December, saying that 2020 “will undoubtedly be known as the year of the SPAC.”

The firm attributed increased activity to heavy trading from individual investors as well as low interest rates that boosted SPACs’ allure.

Over the past decade, about half of acquisitions among SPACs were in the industrial, financial and energy sectors and just around a third were in information technology and health care, according to Goldman. In 2020, almost 70% were in the tech, consumer discretionary and health-care sectors, aligning with the biggest stock winners.

Many say they expect the trend to continue after many success stories.

DraftKings Inc.

and

Nikola Corp.

, for example, surged 335% and 48%, respectively, in 2020 after going public through SPACs.

Growth Companies

As stocks like Tesla and Apple hit highs and options volumes swelled, the divergence between companies promising high growth in the future and other corners of the market grew starker than ever. Shares of companies viewed as bargains in the market, value stocks, floundered, and the gap between the market’s haves and have-nots has never been this wide.

The Russell 1000 growth index outperformed its value counterpart by the largest margin on record, according to Dow Jones Market Data. And while the broader market is flying high, traditional value groups like the S&P 500’s energy sector declined by more than 35% and the financials group fell 4.1%.

Bitcoin

Perhaps nowhere was the zeal for risky investments as evident as it was in cryptocurrencies, where bitcoin prices surged to the first record in nearly three years, crossing the $20,000 mark.

The surge was driven by individual and institutional investors alike, many wading into the market for the first time. Bitcoin kept rising through December to close the year at $28,966.18.

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