The business world and markets entered January with certainty and confidence. A new President, a stable Congress, and the markets poised for a terrific 2021 based on future profits.
Basically, this is still true and 2021 should be a very good year for investors. But the last week of January was filled with massive volatility and confusion. There is much to unpack in the deluge of news this past week.
- A record amount of Presidential executive orders brought a feeling to business that we may be “throwing out the baby with the bathwater.” Suddenly uncertainty and volatility became front and center in the media.
- Johnson and Johnson’s vaccine dropped from over 80% to only 66% effectiveness in treating COVID-19.
- The World Health Organization, which we just re-joined, after leaving in 2020 due to their ties with China and their awful advice in the early days of dealing with what would become a global epidemic, announced that they are not even sure that the Coronavirus began in China, creating more doubt.
- And by the end of the week, Facebook and Apple were fighting over privacy rules that will affect future revenue at Facebook, which drove down the entire Technology Sector, the DOW and the Nasdaq to their worst January since 2016 and worst single day since this past October.
Confused yet?
Then, GameStop shook the stock market—raising important questions about short-selling, social media, and the stock market.
Who started it all?
Meet Keith Gill, the 34-year-old Massachusetts man who sparked the Reddit & GameStop trading frenzy.
Gill ignited the mania over dusty brick-and-mortar retail entities (GameStop and the movie chain AMC) teeter-tottering on relevance and existence.
A Captivating David and Goliath Story
Gill, along with a small army of small-time traders on the social media Reddit forum r/WallStreetBets, helped drive a 1,600% spike in GameStop’s stock price in recent days—forcing halts in trading and causing a major headache for the short sellers betting against it and banking on the stock falling. (Shorting is selling stocks you do not own today with the idea of buying them back in the near future at a much lower price, thereby keeping the differential as profits.)
This was done in protest of Wall Street short sellers looking to profit from the company’s failure, and a captivating David vs. Goliath story.
Are you confused?
Is this legal? Absolutely yes.
Why, is a different question!
Through social media, an upstart retail brokerage company called Robinhood, and with the help of key tweets on Twitter (including powerful endorsements from Elon Musk), the GameStop share price went upwardly crazy and the Hedge Funds needed to sell their most profitable holdings, technology stocks, to “cover” these short positions.
Really confused now?
Today, GameStop is worth so much that it appears to be a bubble ready to burst and thousands of investors will be left with little value. GameStop began the year at $18 per share and finished Friday at $347.51, up 1600%.
However, the underlying fundamentals of this company remained the same with their future relevance still uncertain. And money came out of the major indexes and went to GameStop and AMC.
Robinhood needed to raise $1 billion just to remain viable on Friday, after stopping trading of GameStop on Thursday, raising eyebrows about honesty and ethics.
Thankfully, you are an investor and not a speculator.
Fundamentally, many companies are becoming more profitable as the economy opens and several sectors are experiencing record profits. Of course, there are always winners and losers in every market. We are watching ever so closely to stay in front of this for you, and building our portfolios to reflect this.
And remember, investing includes volatility. That means there will be ups and downs. Sometimes these downs can be painful to watch, but also, sometimes these downs represent opportunities.
As always, keeping your eyes on the long-term and on your financial goals will help steer you through these potholes, accidents, and roadblocks.
Please do not hesitate to call me anytime at 925-314-8503 or email through elliot@prosperityfg.com.
I look forward to seeing you, Zooming with you or speaking with you the old-fashioned way, over the phone.
All my best,
