For those of you for whom we are managing assets I would like to inform you that last week we moved half of your assets to AMC Entertainment and the other half to an obscure company called GameStop…

I wish it were April 1st. Would have made for a good opener. No, we have not invested into either of these and would discourage you from doing so unless it is with your gambling money.

The activity within these and couple of other stocks have rocked the financial world this past week. Many Wall Street veterans have noted that they have never seen anything like it. That is because there has never been anything like it because the technology that has allowed this to happen hasn’t been available until recently. This technology has been used create perhaps the biggest short-squeeze of all time and allowing David to defeat Goliath.

This began within a chat room on Reddit called wallstreetbets where masses of retail investors banded together to take down some of the biggest shorts in the industry, including hedge funds. The main target was GameStop, a retail outlet that sells video games. At one point, the short position was over 140% of all outstanding stock. When someone shorts a stock, they sell stock they don’t own, deposit funds into their account but then at some point will have to buy the same number of shares they shorted to cover their position, with the intention of buying back the stock at a lower price than they sold short.

As the stock rose in price and short sellers were losing money it forced some to cover their positions and, in the process, pushing the share price higher forcing more shorts to cover pushing the share price higher still forcing yet more shorts to cover, etc. On top of short covering, retail investors on apps like Robinhood and others where even tiny investors can buy fractional shares, along with retail investors at eTrade and others put their speculative bets to work driving shares higher still with huge volume in call options. Yesterday, the above-mentioned platforms and others shutdown their client’s ability to buy these stocks, only allowing them to sell, thus driving prices down with such G-force I think many of their client’s passed out.

In addition to being an interesting anecdote in the annals of stock market trading, this phenomenon has, in my opinion, been one of the reasons the overall market has sold off this week. To many it may signal a bubble in the markets or a least a market that seems a bit out of control. I do not agree with either and will address the concern of a bubble in next week’s message. However, I understand the concerns about a market being out of control. That, however, will be a short-lived concern and in my opinion will not have a lasting effect on the markets.

What may have a lasting effect on the markets and the economy are the Executive Orders coming from the new administration. Even the NYT Editorial page is sounding the alarm advising the White House to not govern by Executive Fiat. Since I wrote about the 15 Executive Orders signed on the first day, dozens more have been signed. The concern in the markets is the signaling of priorities for the new administration. Going into the New Year, there were a number of tailwinds for both the economy and the markets. These tailwinds were in large part why the IMF had raised its GDP estimates for the U.S. to 5.5% for 2021.

However, the executive orders have signaled prioritizing social issues over economic and employment growth even at the risk of creating new potential headwinds for the economy and markets. I don’t share those concerns, at least not for now, although I wish the administration would send signals that the economy and jobs growth are a priority. The longer-term implications on the economy and markets of potential changes in the tax code and increased regulations are something I will keep an eye on. However, even if these changes were to create powerful headwinds, I don’t believe we will feel the effects of that for some time. And, in the end, they may not create the headwinds many fear for reasons I discussed last week. Again, we will monitor carefully.

Another concern vexing the markets is the same issue we have all been living with for nearly a year and that is COVID-19. New strains appear to be popping up all over the place and the rollout of the vaccine so far has been a bit of a debacle. As well, the admission from the President recently that there is little we can do to change the trajectory of this pandemic over the comings months came as a disappointment to many with its departure from campaign promises and expectations. With this, there have been rumors of further economic shutdowns. I’m not sure those concerns are well-founded, however, given the data on their ineffectiveness and the fact that CA, NY, and MI, three states with the most severe shutdown orders, are actually now going in the opposite direction.

The pending impeachment trial of former President Trump is being seen as an unproductive distraction for market traders and adding to concerns about Congress passing new pandemic relief sooner than later. Like last year, it appears there will not be enough votes to convict which would, in the end, make the time spent wasted and time that could have been spent more productively on economic relief. We learned last year that the pandemic was well underway in this country while the Senate was fixated for weeks on what again in hindsight was a waste of time. As with last year, there are urgent priorities that should be addressed instead and as such there is talk even among some Democrats to forego the trial, focus on passing stimulus, and censure the former President instead. We shall see.

Because of the above concerns, as I type, the S&P 500 has dipped into the red for year, down roughly (1.3%). I think the direction of the markets for the remainder of the day could be telling for the coming months. While we enjoyed robust growth in the 4th quarter of 2020, bringing the overall decline in GDP for 2020 down to negative (3.5%), our economy remains on very shaky ground. Pulling out of this Pandemic-induced downturn is going to take laser focus from Washington to support the nascent expansion or we may risk a double-dip recession. So far, we are not seeing this focus out of our new government and the markets have been expressing these concerns this week.

There remain plenty of reasons for optimism. Earnings have been a bright spot. Earlier this week, with 13% of the S&P 500 reporting, most have blown away expectations by historic margins with an average beat of 22.4%. Subsequent to that we have seen some of the largest companies in the world—Microsoft, Apple, Tesla, among others, likewise blow away expectations for revenue and in the case of the first two, earnings as well. Recent data revealed that consumer nearly doubled their savings from the 4th quarter last year, increasing from 7.3% to 13.4%. Sooner than later this increased savings should make its way into the economy. It is important that the White House and congress stay focused on the economy to keep this momentum going and pull us out of economic and employment decline.

I will continue to closely monitor developments throughout the comings weeks and months and keep you apprised of any changes we feel we need to make to our current allocations to reflect these future developments.

Scott Barcomb