It was supposed to be the Teflon stock market, capable of absorbing political turmoil, a resurgent virus and mediocre data, and continuing to rise. And all that was needed was a small reduction in stocks that few conventional investors care much about causing the biggest drop in three months.
The S&P 500 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 Nasdaq Composite fell 3.5% to 13,070.69. All three suffered the worst drop since the week ended Oct. 30, while S&P and Dow finished 1.4 percent and 2 percent in January, respectively.
Of course, there was more to it than a wild trade to deal with the stock market. Investors knew that the U.S. economy had grown at a rate of 4%, a decent number in normal times, but not when the economy is trying to recover from the Covid-19 massacre. The long-awaited revelation of
Johnson & Johnson‘s
The data on the vaccine (ticker: JNJ), which was supposed to help rejuvenate the reopening trade, did not meet high market expectations.
But investors were stunned by the rise in very short stocks like
GameStop
(GME) i
AMC Entertainment Holdings
(AMC), companies that had been left for dead, but whose shares certainly weren’t, thanks to a crowd of Reddit investors.
The good news: the pain is likely to be short-lived.
Let’s start with the vaccine. Expectations had been for J&J to report an efficiency rate of at least 80%, but it only reached 66%. Its shares fell 3.6% on Friday after the news broke, and the future S&P 500 suffered a rapid drop amid all the noise of short-term stocks. However, experts were quick to defend the vaccine. They noted that it prevented severe symptoms in 85% of patients, meaning that even those who caught the virus had coughs, smells and fevers, but avoided the worst results, reaching the same level in treatment. of the most contagious South African strain.
“These headline numbers may not be as impressive, but this vaccine has a role to play,” says Dave Donabedian, director of investment at CIBC Private Wealth Management.
That should be great news for the American economy. Things are obviously not booming right now. Gross fourth-quarter gross domestic product grew 4%, a slower figure than economists had predicted at 4.2%, but it was still solid given Covid-related shutdowns over the past three months of the year. We’ll also see what January looks like when payrolls are released on Feb. 5: The U.S. is expected to have added 150,000 jobs last month, up from a loss of 140,000 in December.
Growth is expected to accelerate in the coming months, thanks to vaccines and the fiscal stimulus, which is sure to come one way or another. Bank of America economist Michelle Meyer expects the U.S. economy to grow at a rate of 6% in 2021 and 4.5% in 2022. Full employment could also be reached by the end of 2022 , which would raise inflation to the Federal Reserve’s target rate. And if that’s the case, Fed Chairman Jerome Powell could start raising rates by the end of 2023. “That would clearly be an exceptional result,” Meyer writes. “If all goes as planned, President Powell and [Treasury Secretary Janet] Yellen will be able to make a bow. “
Powell did nothing to suggest a rate hike or even the start of a reduction in bond purchases at this week’s Federal Open Markets Committee meeting. He continued to insist that the Fed will remain easy until it exceeds the target inflation rate and employment growth picks up. The subtext: The Fed no longer relies on economic models to assess when it should tighten monetary policy, but will try to use available data to judge the strength of the economy.
This change has contributed to short-term market volatility, according to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “The Fed has abandoned the framework they had and that Wall Street followed,” he says. “He’s a little detached now and susceptible to storytelling.”
And what a narrative it has been. The short take on GameStop has quickly become a morality story of little guys facing man. I’d rather see it for what it really is: a group of small investors have discovered the joys and potential profitability of daily trading in a way they haven’t seen since the boom and the burst of dot-coms.
One thing traders need to make a profit is volatility, which has been lacking for many years. But it should come as no surprise that the return on daily trading coincides with a market that not only goes up, but also does so abruptly, similar to what investors experienced in 1998 and 1999. things that ended my career negotiating and sent me to journalism was the lack of volatility that started around 2003.
What happens with GameStop is not so new. Wall Street businesses like it
Barclays
i
Jefferies
they have been sending their customers lists of stocks with the most commercial activity. And the rise of GameStop and other very short names has not been so different from the mania of marijuana stocks in 2018, for bankrupt companies like
Hertz Global Holdings
(HTZGQ) in June, or even the rise in electric vehicle stocks in November. Recent businesses have just caught the attention of the market in a way that others have not. That’s partly because investors didn’t have much of a “fundamental” argument for buying GameStop at $ 300, the way they could
Tilray
(TLRY), just think of all the marijuana that will sell once the pot is legalized, or the upcoming dominance of electric vehicles.
But the other big difference is that institutional investors — hedge funds — were very short on GameStop,
BlackBerry
(BB), and the rest. They had assumed that companies were dying, so stocks had to be too. “GME is a reminder to companies with short-term problems at the start of an economic cycle,” writes Nicholas Colas, co-founder of DataTrek Research. “Wolf packs for retail investors are new, but if you’ve ever sat at a hedge fund trading desk, you know that tightening shorts has been a bloody sport on Wall Street for decades.”
This is clear from the way in which the shares that make up the lists of Wall Street’s shortest companies have appeared one by one. But the fact that short sellers are involved doesn’t make these stocks soar the way they are. The missing element is liquidity. In August, options traders were able to move forward
apple
(AAPL) and other higher FAANGs – Apple gained 22% this month before peaking on Sept. 1 – but the huge huge number of companies means it’s harder for a multitude of retailers drive actions.
Not so with GameStop and the like. Jefferies strategist Steven DeSanctis points out that the shortest shares of the small company Russell 2000 have exceeded 28.3 percentage points of the shortest, the largest recorded. The difference in shares of the large-cap Russell 1000 is only 5.4 points, only the ninth largest gap since 1996. The difference in performance is explained by the lower number of shares of the small-cap shares. “Volume goes up, but liquidity goes down,” DeSanctis says.
But credit should be given where it is due. It could have been a crowd that caused GameStop to grow by more than 1,600% in January, but traditional investors like it. The great short filmMichael Burry, head of Scion Asset Management, along with newer ones like “DeepF-ingValue,” has been advocating buying stocks and working their money for a couple of years now. And these businesses really had great value, which required patience to pay.
But you didn’t have to put up with the pain to see something different happen to GameStop over the last six months. It rose 24% on Aug. 31, when RC Ventures, managed by Ryan Cohen, first revealed a 9% stake in the company. It gained 22% on September 16, when it began receiving orders
Sony‘s
PlayStation 5. On October 8 it increased 44% after announcing a multi-year partnership
Microsoft
(MSFT). The shares were traded sideways for a while, but were never about to be tested before October. 8 minimums. For a key analyst, the company could have looked dead in the water. For a technician, it was all but.
As for the market, it has needed rest and will probably have some. One of the side effects of the short squeeze is that it has forced hedge funds to sell the shares they own in order to cover their shorts. This includes some like Apple and
Facebook
(FB), which fell 5.1% and 5.9% last week, respectively, despite solid earnings reports. Increasing market volatility also forces some funds to reduce their long stakes as a way to reduce risk.
While the chances are small, the chance of infection is real. And if nothing else, it will force investors to reconsider what they have and what they want to own in the long run. “We fully expect this type of withdrawal to be a healthy buying opportunity,” says Julian Emanuel, BTIG strategist. “Sounds like some of that speculation will probably be positive.”
The setback arrives just in time. This month of February is the second month of the presidential cycle, and is usually quite terrible, with an average drop of 1.1% in the market. All sectors have experienced an average loss during the second month of the presidential cycle. It’s not that every February is bad (returns were positive 12 times out of 23), it tends to be that way. “You should NOT assume that February 2021 is‘ doomed ’to be a bad month for stocks,” writes Jay Kaeppel of Sundial Capital Research. What you do have to admit is that when the second month is “good”, it’s okay. And when the second month is bad, it’s often very bad. ”
Grab your hats.
Write to Ben Levisohn to [email protected]