After the first month of 2021, the groundhog saw his shadow and a new administration is still trying to pass more economic stimulus through our divided legislature. Vaccines are being administered with geographically varied degrees of efficiency and pictures of happy healthcare workers and senior citizens smiling behind their masks and barring a shoulder on social media. Meanwhile, our economy continues to recover, with the most recent available measures representing some improvement.
|What it measures||Latest numbers||Where we got the data|
|GDP (Gross Domestic Product)||Goods and services produced on US soil||Rose at 4.0% annualized rate in the fourth quarter; fell 3.5% for 2020 overall||Bureau of Economic Analysis (bea.gov)|
|Unemployment Rate||Share of people “in the workforce” who are totally unemployed||Fell by 0.4% to 6.3% in January||Bureau of Labor Statistics (bls.gov)|
Financial markets exhaled after a remarkable closing to a highly volatile 2020.
Below, the darker line is the S&P 500, and the lighter blue is EFA, an exchange-traded fund destined to track the MSCI EAFE.
Source: Wall Street Journal
After a year like that, I think I would take a breather too.
|Reference||What it measures||What it did in January||Where we got the data|
|S&P 500||US large and mid-sized company stocks||Fell 1.1%||Wall Street Journal (wsj.com)|
|MSCI EAFE||Large-cap stocks in Europe, Australasia, and the “Far East”||Fell 1.1%||MSCI (msci.com)|
|Barclay’s Aggregate Bond Index||Intermediate-term, investment-grade US bonds||Fell 0.7%||Morningstar (performance. morningstar.com)|
|US 10-year Treasury Yield||What interest you can earn from a 10-year Treasury note||Rose 0.145%, from 0.919% to 1.064%||
Wall Street Journal
My favorite graph this month, though, was this:
GameStop stock price history; Source: Wall Street Journal
Now that’s a pretty remarkable graph. Reminds me a bit of this picture:
The Little Prince, Antoine de Saint-Exupéry
We do need explanations, don’t we? Many of you have likely heard this populist uprising story, where a Reddit group called WallStreetBets ran up the price of the stock in an attempt to “squeeze the shorts”. I could go into a long explanation of what this means in technical detail, but suffice to say, it appears that a lot of smaller dollar individual investors (boa constrictor) may be having some success going up against large hedge funds (elephant). Some of these individual investors have sold some highly appreciated shares and done heartwarming things with the money like affording lifesaving surgery for their dog. Unfortunately, a lot are still holding the stock and will likely still be holding it when the market takes away the punch bowl. If these investors have only bet on this stock with an amount of money they can afford to lose, then it’s just a good story to tell at a party someday and possibly a useful lesson in investing. I fear this will not be the case for too many.
To what punch bowl am I referring? Eventually, even the frothiest of markets will demand that a stock’s valuation be backed up by actual business results. Remember pets.com? No? That’s because they never made money and the stock tanked in the dot-com bust at the turn of the millennium. Prior to that, however, I remember hearing things like, “markets don’t go down anymore.” Frumpy, old-fashioned, profitable businesses like banks and pharmaceutical companies were getting ignored in favor of seemingly any stock representing a website someone built in their parents’ garage.
GameStop sells and resells physical media in malls. This business model seems shaky in a time when gaming is moving online, entertainment streaming services abound, and malls have been struggling for years. My very smart scientist friend was over to dinner recently, and in response to my pessimism about this story, asked me, “Isn’t there ANY scenario you can imagine where the little guys win here?” Sure- if GameStop executes a brilliant business pivot and suddenly warrants this high valuation. Or even better, it gets gobbled up by a private equity fund, perhaps representing a South Korean Internet Café conglomerate. Then it might be possible that the short-sellers in the hedge funds are forced to fold and the individual investors lock in their gains.
That would be entertaining. But please don’t bet your retirement on it.
The universe is really good at reminding me why, after an advanced degree, a Chartered Financial Analyst designation, and two decades working in investments, I don’t believe in stock picking for individual investors. We are best served by diversifying, minding fund expenses, and focusing on the long term.
 Do not go look at this thread with children looking over your shoulder.
 And if you are REALLY having trouble sleeping, I can explain why Robinhood had to halt purchases of GameStop