It was supposed to be the Teflon stock market, which could absorb political unrest, a reviving virus and mediocre data, and continue to rise. And all that was needed was a brief push in equities, but few mainstream investors are giving much to bring about the biggest drop in three months.
The S&P 500 index fell 3.3% to 3714.24 last week, while the Dow Jones Industrial Average fell 1,014.36 points, or 3.3%, to 29,982.62, and the Nasdaq Composite fell 3.5% to 13,070.69. All three had the worst decline since the week ended October 30, while the S&P and Dow fell 1.4% and 2% in January respectively.
Of course, there was more than just wild trading for the stock market. Investors understand that the US economy has grown by a 4% increase, a decent number in normal times, but not when the economy is trying to recover from the Covid-19 massacre. The long-awaited unveiling of
Johnson & Johnsonsay
(text: JNJ) The vaccine data – the one that was supposed to rejuvenate the reopening of trade – did not meet the high expectations of the market.
But investors were relieved by the boom in heavy short-term stocks, such as in the country
GameStop
(GME) and
AMC Entertainment Holdings
(AMC), companies that were left dead, but whose shares were definitely not, thanks to a crowd of Reddit investors.
The good news: the pain is likely to be short-lived.
Let’s start with the vaccine. It was expected that J&J would report an efficiency rate of at least 80%, but it was only 66%. Its share fell 3.6% on Friday when the news was announced, and S&P 500 futures fell sharply amid all the noise of the short-print stocks. However, experts quickly defended the vaccine. They noted that it causes severe symptoms in 85% of patients, meaning that even those who contracted the virus had coughs, sniffles and fever but avoided the worst results while reaching the same level of treatment of the more contagious South African tribe.
“The headline numbers may not be that impressive, but this vaccine has a role to play,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management.
That should be good news for the US economy. Things – of course – are not blooming at the moment. Gross domestic product in the fourth quarter grew by 4%, which was slightly slower than economists had predicted, but still firm given the Covid-related downturn during the last three months of the year. We’ll also take a look at what January looks like when the payrolls are released on February 5 – the United States is expected to have added 150,000 jobs over the past month, up from a loss of 140,000 in December.
Growth should accelerate in the coming months, thanks to the vaccines and fiscal stimulus, which will come almost somehow. Bank of America economist Michelle Meyer expects the U.S. economy to grow by 6% in 2021 and 4.5% in 2022. Full employment can also be achieved by the end of 2022, which will increase inflation to the target rate of the Federal Reserve. And if that is the case, then Fed Chairman Jerome Powell could start raising rates by 2023. “This will clearly be an exceptional result,” Meyer writes. “If everything goes as planned, Chairman Powell and [Treasury Secretary Janet] Yellen will be able to bend. ”
Powell did nothing to suggest an interest rate hike or even the start of a decline in mortgage purchases at the Federal Public Market Committee meeting last week. He continued to insist that the Fed would remain easy until it exceeded its target inflation rate and restored job growth. The subtext: The Fed no longer relies on economic models to determine when to tighten monetary policy, but will try to use the available data to assess the strength of the economy.
This change has contributed to short-term volatility, says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “The Fed gave up on the framework they had and what Wall Street followed,” he says. “Now it’s a little loose and susceptible to narration.”
And what a narrative it was. The GameStop short print quickly became a moral tale of little guys taking on the man. I prefer to see it for what it really is – a bunch of small investors have discovered the joy and potential profitability of day trading, in a way they have not discovered since the boom in dot-com.
One thing traders need to make a profit is volatility, and it has been lacking for many years. It should come as no surprise, however, that the returns of day trading coincide with a market that is not only higher but also performing sharply, similar to what investors experienced in 1998 and 1999. One of the things that ended my trade and sent me into journalism was the lack of volatility that started in 2003.
What’s happening with GameStop is not even that new. Wall Street businesses love
Barclays
and
Jefferies
sent their customers lists of the stocks that see the most retail activity. And the increase in GameStop and other strongly abbreviated names was not entirely different from the mania for marijuana stocks in 2018 for bankrupt companies like
Hertz Global Holdings
(HTZGQ) back in June, or even the rally in shares for electric vehicles in November. The recent operations have just caught the market’s attention in a way that others have not done. This is partly because investors did not have much of a ‘fundamental’ argument to buy GameStop for $ 300, just as they could
Tilray
(TLRY) – just think of all the marijuana it will sell once pot is legalized! —Or the coming dominance of electric vehicles.
But the other big difference is that institutional investors – hedge funds – were very short GameStop,
BlackBerry
(BB), and the rest. They assumed the businesses were dying, so should the stocks. “GME is a reminder not to shorten businesses at the beginning of an economic cycle,” writes Nicholas Colas, co-founder of DataTrek Research. “Small wolf packages for retail investors are new, but if you’ve ever sat on a hedge fund commercial bank, you know that shorts have been a blood sport on Wall Street for decades.”
This is clear from the stocks that make up Wall Street’s shortest list of companies. But the mere fact that short sellers are involved does not allow these stocks to soar. The missing element is liquidity. In August, option brokers could rush
appeal
(AAPL) and other FAANGs higher – Apple rose 22% during the month before peaking on September 1 – but the sheer size of the companies means it’s harder for a crowd of traders to turn the stock around pressure.
Not so with GameStop and its kind. Jefferies strategist Steven DeSanctis notes that the shares in the small business Russell 2000 outperformed 28.3 percentage points with the most short-circuits, and the largest on record. The difference in shares in the large-cap Russell 1000 is just 5.4 points, only the ninth largest gap since 1996. The difference in performance can be explained by the lower number of shares in small-cap stocks. “The volume is higher, but the liquidity is lower,” says DeSanctis.
But credit must be given where it is payable. It may have been a mob that caused GameStop to rise more than 1,600% in January, but traditional investors like it The big shortMichael Burry, head of Scion Asset Management, along with innovations such as ‘DeepF – ingValue’, has been arguing for several years about buying the stock and putting their money to work. And these operations were really deeply valuable, and they had to have patience to bear fruit.
But one does not have to endure the pain to see that something else has happened to GameStop over the past six months. It rose 24% on August 31, when RC Ventures, managed by Ryan Cohen, first announced a 9% stake in the company. It rose 22% on September 16 when it started taking orders for
Sonysay
PlayStation 5. On October 8, it rose 44% after entering into a multi-year partnership with
Microsoft
(MSFT). The stock traded sideways for a while but never came close to testing the test before October. 8 lows. To a fundamental analyst, the company may have looked dead in the water. For a technician, it was anything but.
As for the market, he needed a resting place – and it would probably get one. One of the side effects of the short print is that it has forced hedge funds to sell the shares they own in order to cover their shorts. These include like Apple and
Facebook
(FB), which fell 5.1% and 5.9% respectively in the past week, despite strong earnings reports. The increased market volatility is also forcing some funds to reduce their long holdings as a way to reduce risk.
Although the chances are small, the possibility of infection is real. And if nothing else, it will force investors to reconsider what they own and what they want to own in the long run. “We fully expect this type of withdrawal to be a healthy buying opportunity,” said BTIG strategist Julian Emanuel. “Eliminating this speculation is probably positive.”
The setback comes right on schedule. February is the second month of the presidential cycle, and it is usually terrible, with a 1.1% drop in the market. Each sector averaged a loss during the second month of the presidential cycle. It’s not that every February is bad – the returns were 12 times out of 23 positive – it’s just that. “You should NOT assume that February of 2021 is ‘doomed’ to be a bad month for equities,” writes Jay Kaeppel, Sundial Capital Research. “What you do need to recognize is that it’s good when month 2 is ‘good’. And if month 2 is bad, it’s often very bad. ”
Hold on to your hats.
Write to Ben Levisohn by [email protected]