John Gorlow
| Feb 16, 2021
2020 was one of the most traumatizing years in modern history. Then January 2021 started off with more new dramas. A deadly insurrection at the Capitol. A second Impeachment. The inauguration of a new US president, a special election in Georgia, and Democrats gaining control of the US government. Through it all, the saga of Covid-19 continued to unfold with news of supply shortages, unequal access to vaccinations, fast-spreading mutations and more. To top it off, there was the wild GameStop story.
January markets were understandably unsettled. The Dow fell 2% and the S&P 500 fell 1.1%, even as both indexes set several new records over the course of the month. Volatility was back, as measured by the CBOE Volatility Index which climbed 45% in January. The benchmark 10-year U.S. Treasury bond yield rose to 1.09%.
January followed on the heels of a December slowdown, brought on by a surge in Coronavirus cases and lack of timely fiscal support. As state and local governments restricted activity, consumers stayed home and many businesses were shuttered for a second time. The contrast between Q3 and Q4 2020 was sharp. In Q3, markets rebounded as the US government pumped trillions into the economy. When businesses and consumers ran out of stimulus fuel in Q4, the economy was slammed.
By now we have some perspective on last year, and US GDP numbers tell the story: up 1% in the last quarter of 2020, versus 7.5% in Q3. On an annualized basis, GDP rose 4% in Q4 versus 33.4% in Q3. These spectacular swings add up to a terrible economic year by any historic measure. Compared to 2019, GDP ended 2020 down 2.5%, the worst year on record since 2008, when GDP slumped 2.8%. The New York Times reports that GDP fell 3.5% when comparing 2020’s output over all with the previous year’s performance. It was “the worst since reliable records began after World War II” (Ben Casselman, 28-January 2020).
As we’ve been reporting since last March, the wild bust-and-boom cycle of Covid-19 must eventually end. No one ever believed that the torrid pace of GDP acceleration from the trough was sustainable. Expectations had to come back to earth. Even so, the landing might have been much uglier. The economy has rebounded more quickly than most forecasters predicted. The Congressional Budget Office predicted a 2020 decrease of 5.6%, followed by a long slog to pre-pandemic levels by 2022. Now many expect that benchmark will be reached in 2021. (Of course, anything can happen. We’re not in the prediction game.)
There’s new hope as government stimulus money is now flowing into the economy and more is likely to follow. The vaccination rollout is becoming better organized. Economists and forecasters agree that addressing the pandemic effectively—that is, getting more shots into more arms more quickly—is the only road to full economic recovery. But knowing what needs to be done and getting there are two different things. The new administration must address the pandemic while simultaneously helping a massive number of Americans contend with unemployment, eviction threats and hunger. Schools and businesses must be reopened safely. Vaccines must be distributed equitably. We may see the light at the end of the tunnel, but we’re still in the tunnel.
Where There’s Volatility, There’s Greed
GameStop is the other big story of January. Nothing is as enticing as the potential for a fast, easy profit, especially during turbulent times. This has been true as long as markets have enabled people to invest. But the GameStop story is one of the weirdest ones yet. There are many ways to interpret what happened: a story of David and Goliath, a “regular Joe” stirring up a fan base, or a wily investor inciting a populist revolution. Whatever story you like, you can’t ignore the fact that GameStop (GME), a heavily shorted company, was lifted to unbelievable valuations thanks to a mob of investors led by a guy in a cat tee-shirt.
And yet we’ve seen this movie before. I agree with Ben Levisohn (Barron’s, 1-February 2020) that the GameStop mania wasn’t so much about “little guys taking on the man,” than “a bunch of small investors … [discovering] the joys, and potential profitability, of day trading in a way they haven’t since the dot-com boom and bust.”
Surges in day trading occur during periods of volatility. Think biotech and internet stocks in the 1990s, or the intense interest in bankrupt Hertz Global Holdings last June, or the rally in electric vehicle stocks (i.e., Nikola) last November. The difference this time is that GameStop could in no way support any kind of “forward-looking, this is the future” vision. The difference was a sort of mob mentality that went in the opposite direction of Wall Street. “Retail wolf investors are new, but if you’ve ever sat on a hedge fund trading desk you know squeezing shorts has been a Wall Street blood sport for decades,” says Nicholas Colas of DataTrek Research (as quoted in the Barron’s article above). Colas takes away this lesson: hedge funds “assumed the businesses were dying so the stocks must be too.” And also: “don’t short troubled companies at the beginning of an economic cycle.”
Some GameStop investors bet big and lost big in a very short amount of time. If you didn’t get involved in GameStop pat yourself on the back. Investing and gambling is not the same thing, DFA’s Dave Booth reminds us. If you treat it as such you must pick the right stock at the right time and know exactly when to sell. You may get lucky once or twice. It is highly unlikely that you will get lucky over the course of an investing lifetime. Making money slowly is much better than making, then losing, money quickly—sage advice from Mr. Booth.
To be sure, these are unsettled times. That’s why it’s important to have a sound strategy tailored to your specific needs and timeline. Don’t be greedy, or impatient. Don’t worry about market gyrations. There will be plenty of twists and turns ahead as the world works its way back from a global pandemic. Stay focused on your goals and keep yourself healthy, mentally and physically.
Do you have questions or concerns about your portfolio? Call me, I am here to help.
Regards,
John Gorlow
President
Cardiff Park Advisors
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