The year started with the invasion of the Capitol, an unprecedented event which was coupled with euphoric markets despite the Blue Wave. Then markets continued to surprise us with the war declared by young retail investors, the so called Redditors, against Hedge Funds.
Even if this is all about speculation, and less about fundamentals, this story shook capital markets and continues to impact them. At the epicenter of this “more-addictive-than-a-Netflix-series” story, stands one stock: GameStop. After it had been heavily shorted by several Hedge Funds, the Redditors decided to massively buy the company’s shares creating a short squeeze, hitting traders with short positions and causing them a $20 Billion loss in value. This forced Hedge Fund Melvin Capital to accept a bailout from two larger Funds, Citadel and Point 72, in order to stay afloat. The main message those Redditors wanted to send to Hedge Funds is that this WSB (Wall Street Bets) community can take power into its diamond hands* and even control places like the stock-exchange. Some of them also called it revenge, after many Hedge Fund shareholders became substantially richer during the 2008 financial crisis, while most of the middle class was struggling - although, Melvin Capital was founded in 2014, way after the subprime crisis.
At the time these lines are being written, GameStop has erased more than 80% of its recent gains in only a week, nevertheless, and that is the most interesting point, the short interest in the stock remains relatively high, meaning that some traders are still waiting to cover their short positions, while, on the other side, some Redditors are still holding their long positions. History has taught us that big actors are more powerful than the retailers, but recently we have been surprised by the capability of connected people. We now must wait and see whether history will repeat itself and this trading mania was just a short episode of 2021, or, this time, the retailers will manage to make it to the moon*. Time will no doubt tell…
In a sharp transition to another matter: on his first day in office, President Biden acted to make some changes regarding Coronavirus-linked restrictions and policies. He also rejoined the Paris Climate Agreement and the World Health Organization. His Green Agenda would involve a $2 trillion investment plan to be deployed during his mandate. Finally, he proposed a new stimulus plan of $1.9 trillion, however, since then he has been engaged in talks with Republicans who mainly think it is too early to deploy such an amount and propose a more targeted plan of ~$600 billion. As of today, it seems that Democrats will move ahead to vote the relief bill in the Senate with or without Republican support, during a “vote-a-rama” (an extended debate including a minimum of 15 votes). The risk of this move is for Biden to divide the Congress, after he has been preaching unity and reconciliation since he came into office.
During the first FED meeting of the year, Chairman Powell left rates and policy unchanged (as expected) and emphasized the fact that he is worrying less about an increase in inflation which could be the result of further stimulus and more about unemployment and jobs creation. In the meantime, the economic situation is improving in the US, with better-than-expected manufacturing data and unemployment numbers.
In the Eurozone, the inflation numbers surprised with a core inflation at 1.4%, the highest level in five years. During the first ECB meeting of the year, Chairwoman Lagarde left rates and policy unchanged but stated that if the outlook deteriorates, easier financing conditions and more purchases will be needed. Meanwhile, beside Corona, Italy was facing political chaos, following the recent resignation of Prime Mi
nister Conte after the loss of his parliamentary majority. However, the country should know better days soon with Mario Draghi, the former president of the ECB, accepting the post of the new Prime Minister and the task of forming a government.
January also saw the kick-off of the earnings season, with still a clear distinction between the beneficiaries of both the pandemic and the low rates environment and … the others. In consequence, companies in the Banking and Energy sectors, even if they surprised on the results, disappointed on their forward guidance while the Tech sector reported record revenues. Among the best reports, Apple and Amazon reported record revenues of above $100 Billion, and Amazon’s investors had to process the news that Jeff Bezos is leaving his role as the company’s CEO.
Concerning Covid-19, the virus is still very much around with more mutations emerging and therefore more lockdowns and travel restrictions being put in place worldwide. As for vaccines, Novavax announced that its late-stage trials showed 89% effectiveness and that its vaccine is also highly effective against the more contagious and deadly variants of the virus. The company’s share price doubled on the news. On the other hand, Johnson & Johnson trials results disappointed with a 72% effectiveness in the US and much less in other less developed regions like Latin America and South Africa. In the meantime, the leading country in vaccination distribution, Israel, became a case-study for the rest of the world.
On the commodities side, Gold consolidated some of its 2020 gains, while Oil continues to be supported, not only by an anticipated recovery but also by some production cuts from Saudi Arabia and Iraq. However, if shares of companies in the (traditional) Energy sector are still up YTD, this sector is being more and more impacted by Renewable Energies: S&P announced some downgrades of major energy companies because of the increasing competition between fossil fuels and clean energies.
On the credit side, spreads tightened for both investment grades and high yields during January. The 10 Year US treasury yield jumped by 20 bps in a week, reaching 1.1460%, the highest level since March. It raised some concerns about a potential sooner-than-expected rate hike, however Powell reassured investors by making it clear that rates will not be increased before 2023.
Muni bonds are still supported for now: hopefully, they will receive further aid as part of the next stimulus plan, although Republicans are pushing to take them off the deal.
As for Equities, for now we favor a balanced allocation between growth and value stocks, with an emphasize on Green Energy and China, the latter being our favorite long-term exposure within emerging markets. We still stay cautious, as some indicators show that we are close or into an overbought territory for the main indices, which could be a warning signal before a sharp correction
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As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
You are more than welcome to contact us to discuss our investment views or financial markets generally.
*’To the Moon’ and ‘Diamond Hands’ are two frequently used terms by Redditors.