Market Update - January 31, 2021
Hope all is well. The major U.S. stock indexes couldn’t maintain the previous week’s positive momentum, as the S&P 500, the Dow, and the NASDAQ all fell more than 3%―the worst week since late October. The big shift came on Wednesday, when the indexes lost more than 2% and the S&P 500 retreated from the record high it had reached a day earlier. It was a mixed January the S&P 500 and the Dow fell 1% to 2% for the first month of the year while the NASDAQ posted a more than 1% gain, lifted in part by strong earnings from technology companies. The market’s positive start to 2021 reversed course entering the closing days of the month. Historically, January’s stock market performance has been a strong indicator of what may be in store for the rest of the year. In fact, more than 70% of the time the S&P 500 has posted a positive return for the year after gaining ground in January or has gone on to post an annual loss when the market has declined in the first month, according to S&P Dow Jones Indices. I have broken down this week's market news using quotes from the classic John Candy and Steve Martin movie Planes, Trains and Automobiles.
“I could be a cold-hearted cynic like you, but I don't like to hurt people's feelings.”-Del Griffith (John Candy)
The market is continuing to put a positive spin on negative numbers as earnings continue to beat their lowered expectations. Fourth-quarter earnings continued with results from more than one-third of companies in the S&P 500 as of Friday, earnings were projected to end up 2.3% lower than they were a year earlier. That’s an improvement on the 4.8% decline that had been expected.
“You can start by wiping that... dumb-ass smile off your rosey, ... cheeks!”-Neal Page (Steve Martin)
Volatility spiked, expectation of short-term stock volatility surged more than 50% for the week, rising to its highest level in three months. The jump was fueled in part by so-called short squeeze battles that triggered wild rides for shares of electronics retailer GameStop and AMC movie theater chain.
I will try to explain what happened in simple terms. GameStop and AMC saw millions of regular investors band together on social media and buy shares to drive up the price and take on hedge fund investors who were betting on the stock going down. On the surface, what happened seemed great. It's the little guy beating the professional at their own game. However, there is risk of significant collateral damage. By the end of the week, investors were piling in and driving up the price in a bevy of unsound investments like Blackberry, Dogecoin, Tootsie Roll and Nokia. There are two significant risks, one is the person watching at home who is thinking they are missing out and goes in after most of the gains have been made and then ends up riding a bad investment all the way down. That risk will not move markets, it's a buyer beware risk. The second risk is much larger. We saw GameStop stock mentioned throughout the week across all media outlets. As we have seen in other areas of life when the public gathers in unison to take down the establishment the movement grows and grows fueled by the oxygen given to it by the media. If this grows and the public continues to attack every company Wall Street is betting against then money managers will need to sell the stocks they are betting on to cover the losses on the stocks they are betting against. So good stocks like Apple, Amazon, etc. will get sold to raise cash. Which will hurt Wall Street, but those stocks are held in almost every mutual fund and ETF. As such, they are in just about everyone’s 401k. So this attack on the rich hedge funders could end up hurting the majority of the people they are claiming to champion.
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