THE WEEK IN REVIEW: Jan. 24 – 30
Gamers: Unite!
Higher volatility and trading volumes combined to push markets downward last week. Wednesday was the worst day for stocks since October, and the S&P 500, Nasdaq and Dow Jones all ended the week down over 3%.
At the center of the furor? Gamestop, of all companies. The gaming retailer has struggled in recent years, and major hedge funds were “shorting” the stock. (In a short trade, an investor borrows shares and then sells them, hoping to profit by buying them back at a lower price in the future. Essentially, they’re betting on the company to fail.)
Reddit message board users banded together to buy the stock and a handful of others, driving the prices up astronomically. This put the “squeeze” on the hedge funds, who sold out of other stock positions to cover their losses mid-week. On Thursday, many of the major online trading platforms restricted buying of the affected stocks, leaving some calling foul. By the end of the week, a class-action lawsuit had been filed against Robinhood, the discount brokerage that has previously raised some eyebrows about its practices.
The drama will most likely spill into the coming week. Volatility, which had been hovering in the low 20s for several weeks, shot up to nearly 38 and remains elevated. GameStop’s stock has increased as much as 1,800% just this month; we’ll see if it comes back to earth in the coming weeks.
On another note, there have been some questions as to whether any AEWM strategies utilize options. AEWM models/strategies do not utilize options or engage in any leveraged practices. Our strategies/model portfolios are long only and have a one-to-one exposure to their relative underlying benchmark. As an example, very simply, if the model/strategy you are using is benchmarked to a 60-40 blend of U.S. domestic equity and fixed income, your investment results will fluctuate on an equally proportionate basis with the benchmark. I hope that helps ease some concerns.
Immovable Object
As the market raged, the Federal Reserve concluded its monthly meeting on Wednesday. As expected, the Fed chose to stay put, leaving rates near zero and keeping its bond-buying program in place. It’s not surprising, given the economy’s turtle-like pace of recovery. Gross domestic product grew at an annualized rate of 4% in the fourth quarter, which is moving in the right direction but seems anemic compared to the 33.4% we saw in Q3.
Unemployment also remains stubbornly high, although initial claims dropped from 914,000 to 847,000 last week. That number may begin to come down soon as some states lift restrictions. California, which has been under stay-at-home orders since the first of the year, tentatively reopened last Monday, almost one year to the day after confirming its first coronavirus case.
President Joe Biden also announced changes to the vaccine rollout last week. The rollout, which has moved at less “warp speed” and more “glacier speed,” has been hampered by a lack of supply. Most states report they have plenty of arms to stick, but they don’t have the doses to give. Biden’s plan calls for 10 million doses to be distributed weekly, up nearly 1.4 million from its current number, and for the U.S. to purchase more than 100 million additional doses of the Pfizer and Moderna vaccines.
On the surface, it appears the economy is in a state of stasis. Right now, we can focus on positive news: vaccines are being distributed and states are reopening, even if it’s slow. Building momentum always takes persistence and patience. Hopefully, we’ll start to make progress toward recovery as we head into February.
Madame Secretary
Janet Yellen was confirmed as treasury secretary last week. The former Fed chair is the first woman to lead the department. Her first task is a big one: Leading the U.S. out of this economic impasse.
Coming this Week
  • The ADP employment report will come out on Wednesday, and January unemployment rates will be released on Friday. It’s probably good to keep expectations low on that front, especially since many states remained locked down during most of January.
  • A few pieces of economic data will be released this week, including manufacturing PMI and construction spending on Monday, and services PMI on Wednesday.
Have a great week!
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