Wild Week on Wall Street
It's been an interesting week in the markets as the push-and-pull between retail investors and institutional investors has become public for all to see. Here's a sample of what we're seeing.
• Pricing War. Two weeks ago, retail investors started investing in GameStop (GME) as the result of better-than-expected holiday sales and the announcement of 3 new board members to its board. These new board members consisted of Chewy.com founder Ryan Cohen and two other former Chewy.com executives. The theory was that these new board members could help the company make a turn around. This is very speculative, as GameStop’s current business model may struggle against Microsoft (Xbox), Nintendo (Switch), and Sony (PlayStation), because there have been no announcements about how these new board members suggest changing the GameStop business structure. Meanwhile, Hedge Funds this week lined up against retail investors buying the stock by taking considerable short positions against GME. This only fueled retail investors who pushed the stock higher while some funds, namely Melvin Capital Management, have taken a bath as they have been stopped out on their short positions. This added volatility to markets as hedge funds had to sell some long positions in order to cover their shorts on GME. While interesting theatre, the battle continues with more stocks being drug into the war - namely, AMC Entertainment (AMC) and American Airlines (AAL). I am no fan of speculative stock buying. However, it is a little satisfying to see the large institutional hedge funds getting a taste of their own medicine. It’s no secret that the Quant/Hedge Fund managers move markets at their whim and retail investors are the ones that often suffer - now the Hedge Funds are seeing things from the other side of the coin. Ultimately, this battle probably won’t end well for the Retail Investor taking speculative positions in stocks they know little about. The moral of the story: clients need Financial Advisors to guide them if they are going to play in the same league as larger, more well-capitalized institutional investors.
• Fundamentals Look Good, Despite Warning From the Fed. So far this week, the economic releases have been positive overall. First off this week was the Chicago Fed National Activity Index, which showed a considerable increase in December over November. The Dallas Fed Manufacturing Index was down month-over-month, but still in expansion territory. The FHFA Housing Index and the Case-Shiller Home Price Index showed improvement for November versus October, but those are a bit lagging in release. Consumer Confidence for January rose considerably to 89.3 versus 87.1 in December. Tomorrow, we will get the trifecta of consumer info – Personal Income, Consumer Spending, and Consumer Sentiment. Redbook Retail Sales showed improvement over the week as states begin to re-open and consumers can resume spending practices again. Durable Goods disappointed with only a 0.2% increase in December versus +1.2% in November. The Fed caused a stir yesterday with their language around the Coronavirus. While they left rates unchanged and their bond-buying program in-tact, the Committee expressed concerns over the perceived long road ahead to defeating the virus. Markets sold off yesterday, but have already recovered more than half of those losses today as Weekly Jobless Claims came in lower than expected at 842k vs. 865k expected and dropped below 900k for the first time in three weeks. Fourth Quarter GDP came in at +4%, which was below the Atlanta Fed’s GDPNow projection of +7.5%. New Home Sales for December disappointed this morning, +842k units versus +865k expected. However, sales were still higher in Dec than in Nov by almost 20k units. The Chicago Fed’s National Financial Conditions Index continues to show steady financial conditions.
• Improvement on the Virus Front. Cases and Hospitalizations continue to decline overall. The 7-day average a new cases is rising in only 1 state/territory (see graph below). The 7-day average of new cases has declined 35% since the peak on January 11th. Positive test results have declined from 13.7% three weeks ago to 8.9% as of yesterday. Hospitalizations are down 19% from the peak on Jan 6th. Meanwhile, more than 44 million doses of the Moderna & Pfizer vaccines have been delivered, with more than 26 million shots administered and close to 4 million people fully vaccinated. The Johnson & Johnson vaccine, which will require only 1 shot, is just weeks away from FDA approval, which will be a game changer. It has been estimated that nearly 70% of the U.S. population would need to have either the vaccine or have recovered from COVID in order for herd immunity to be achieved. Currently, the CDC estimates that nearly 40% of the population has the COVID antibodies, so we’re more than half way there.