New Investors Jump Start the New Year

March 3, 2021 | Written by Jericho Cezar

After the S&P 500 ended 2020 up 15.76%, investors started 2021 optimistic about vaccine rollouts and fiscal stimulus that would aid businesses back to normalcy. Investors continued their search for value until a brick and mortar video game retailer took headlines by storm.

GameStop ended 2020 with a record climb of over 200% despite concerns of bankruptcy and a devastating decrease in foot traffic caused by COVID-19 lockdowns. This rally continued into late January until shares of GameStop surged from $20 to $350, a 1,650% rise in two weeks, which eventually peaked at $480.

Up to this point, major hedge funds had accumulated a total short interest of 140%. Melvin Capital, the most prominent player among these hedge funds, was short GameStop since 2014 believing the dying retailer would not recover. This heavily contrasted the beliefs of retail investors on the subreddit r/wallstreetbets, known for their high-risk trades and use of options. Retail investor Keith Gill (aka Roaring Kitty on YouTube) became the most prominent GameStop bull with his large positions and detailed analysis convincing others of a GameStop rebound.

Immense retail investor optimism combined with the abnormally large short interest resulted in a short squeeze where demand for a heavily shorted stock raises the price and forces short holders to cover their positions, further increasing the price of the stock. Soon enough, millions of retail investors began buying GameStop shares causing the astronomical rise in late January.

On February 2nd, several brokerage platforms began restricting buy orders of GameStop shares. Robinhood was in the center of the controversy as it was the preferred platform for many retail investors buying GameStop and speculation into their relationship with Citadel, who had investments with Melvin Capital, sparked accusations of malpractice. Robinhood stated their decision was based on deposit requirements with clearinghouses that were endangered by GameStop’s volatility.

In the aftermath, shares of GameStop plummeted back to $40 a share. On February 17th, the House Financial Services committee brought Vlad Tenev (Robinhood CEO), Keith Gill, Ken Griffin (Citadel CEO), and Steve Huffman (Reddit CEO) to testify about their involvement in GameStop’s volatility. Retail investors claimed that hedge funds attempted to manipulate the market to profit from their short positions and, when this didn’t materialize, brokerage firms restricted trades to prevent further losses at the expense of retail investors. Hedge funds and institutions claimed that retail investors leveraged social media to create a pump and dump scheme which only ended when brokerage firms restricted trades to protect individuals. Investors watched their testimonies closely to gauge whether new legislation would be created to increase short position transparency or prevent market manipulation.

Despite the volatile GameStop saga, investors kept their eyes on the long-term economic recovery.

For one, vaccine rollout has sped up significantly since Biden took office. The United State’s initial goal was to have 20 million people vaccinated by the end of 2020, but only 3 million were vaccinated at year end. The new administration has set their goal for 100 million vaccines in the first 100 days with over 40 million people already receiving a first dose and an average of 1.7 million people receiving COVID vaccines per day. Supply distribution delays are still prominent obstacles especially in Texas where millions of residents are without power due to an unprecedented winter storm. Markets are still optimistic about vaccine rollout speeding up economic recovery as cyclical sectors like financials and energy are outperforming.

On February 19th, Democrats revealed their full $1.9 trillion stimulus bill that they have been pushing since late 2020. This bill includes $1,400 direct payments, raises to the federal minimum wage, and adds further budget increases to support the vaccine rollout. Investors are keeping a close eye on continued fiscal support as 10.1 million citizens are still unemployed. Even with people receiving vaccines at a faster rate, if individuals that lost their jobs are not able to get the support they need, economic recovery may be slowed.

Better than expected Q4 corporate earnings have also lifted investor sentiment in the new year. On average, companies have been beating analyst expectations by 17% as analysts have underestimated the pace of the current economic recovery. These strong earnings somewhat help justify the historic valuations equity securities are trading at. The Shiller P/E ratio for the S&P 500 is currently 34.13, the second highest it has been since the internet bubble.

High valuations are not the only factor that is weighing in the minds of investors. Much of the rise in stock prices can be attributed to the near zero interest rates the Federal Reserve set last March. With rates this low, investors are forced to take on more risk to achieve the returns they previously enjoyed pre-pandemic. The Federal reserve plans to continue to support equity markets with near zero interest rates; but, with treasury yields increasing 41 basis points since January, investors will be re-evaluating the risk premiums on their portfolios.

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