The Revolt of the Retail Trader - Holdun

Market Summary

The major U.S. stock indexes couldn’t sustain the previous week’s positive momentum, as the S&P 500, the Dow, and the NASDAQ all fell more than 3%.

In a month that typically functions as a strong indicator for what is in store for the remainder of the year, January’s broadly positive start was wiped out by high levels of volatility in the closing days of the month.

The S&P 500 fell 1% in the first month of the year while the NASDAQ posted a 1.4% gain, buoyed by the higher-than-expected earnings of the most loved tech names.

Volatility spiked this week as finance’s answer to David vs. Goliath engulfed the market. David, in this case, took the form of Reddit retail investors, who banded together to punish Wall Street speculators for betting against GameStop, a previously unloved video game retailer. Without going too deep into the subtext, GameStop shares surged from $19 at the start of the year to as much as $483 at one point this week.

The success of the Gamestop squeeze didn’t go unnoticed and led to increased interest in all high short interest stocks, with companies such as AMC and Nokia also seeing massive jumps as retail investors attempted a rinse and repeat approach to all heavily shorted companies.

Equities

3.3%S&P 500

Short-term volatility jumped over 50% this week, resulting in the worst week for stocks since October 2020. This week’s siege on Wall Street’s short sellers added to the recent tone of caution in the market. Still, while concerns about rising COVID-19 cases, bumpy vaccine rollouts kept investors apprehensive about a pullback and an increase in volatility in the near-term, the start to quarterly earnings has eased some concern about stretched stock valuations.

Currency

0.2%USD/EUR

The dollar started the week strongly, but this fizzled out as the week drew to a close as nervousness about an assault on hedge-fund equity short positions eased in foreign exchange markets. Fears that the U.S. President Joe Biden’s fiscal stimulus plans may not be as large as the proposed $1.9 trillion also had market participants favouring Dollar safety for much of the week.

Bond Yields

1.09%US 10Y TREASURY YIELD

U.S. Treasury yields extended gains on Friday after data showed inflation perked up last month. Employment costs also rose, suggesting the world’s largest economy is on the mend from the devastating effects of the pandemic. Next week’s U.S. non-farm payrolls report should provide more evidence about where the economy and interest rates are headed. Further evidence showing a potential pick up in inflation will help to push the 10-year away from the 1.00% range it has been anchored to of late.

Commodities

3.4%BITCOIN

Bitcoin, not to be outdone by bizarre events elsewhere, jumped roughly 16% to $37,333 on Friday, after Elon Musk added the word ‘bitcoin’ to his Twitter biography. I’m not sure it gets more speculative than that.

best-0.1%Real Estate

Worst-6.5%Energy

Market Outlook

Broadly speaking, earning seasons has been positively received thus far, with tech names like Apple and Netflix continuing to push revenue higher. According to FactSet, more than one-third of companies in the S&P 500 have reported as of Friday, with earnings now projected to be 2.3% lower than they were a year earlier. That’s an improvement on the 4.8% decline that had been expected the previous week. Of the 184 companies in the S&P 500 that have reported Q4 2020 earnings, 84.2% have topped analyst expectations, well above the 75.5% beat rate for the past four quarters.

As the earnings season unfolds, we expect technology and health care to continue to outperform given the stay-at-home environment and the staggered roll-out of the vaccine. While the pandemic induced lockdown remains, cyclicals such as energy and consumer discretionary companies are likely to struggle. Given a more widespread and targeted delivery of the vaccine, we expect those most hindered by the pandemic (cyclical and value-oriented areas of the equity market) will see a reversal of fortunes, outperforming their growth counterparts over the second half of the year.

HOLDUN