The major topic of last week was retail investors versus Wall Street behemoths. In this David vs Goliath fight fortunes were made and lost, causing volatility in the equity markets. VIX, also known as the Fear Index, spiked to 37.2, the highest it has been since October 2020.
Retail trading really took off last year with the recent introduction of zero fees and access to the market through a number of brokers, such as Robinhood, TD Ameritrade and Interactive Brokers, to name a few. People who had been idle and receiving government support discovered discussion websites, such as Reddit, to get trading ideas and found a community looking to converse market views. Oftentimes contrarian views emerged that were viewed as irrational – such as buying shares or call options on Hertz, a car rental company that went bankrupt early 2020. As speculative as this market activity was perceived to be, it was allowed to continue. Until January, when Reddit subgroup Wallstreetbets made the headlines after its members started a buying frenzy of stocks that were considered to be distressed. Names such as Gamestop, Blackberry Inc, AMC Entertainment, and so on. WSB members had realized that institutional players had opened disproportionately large short positions against those names which opened an avenue for a short squeeze. What followed was quite baffling – large hedge funds exposed on the short side, were forced to close positions at 100% loss, causing U$ 13 billion AUM funds to seek a bailout. Humongous spike in share prices and subsequent falls caused ripple effects across the markets and Janet Yellen commented that she and her team are monitoring the situation. As a culmination, retail brokers who were facing the clients, restricted trading temporarily, or forced liquidated positions for those names. A number of lawsuits were filed against those firms on the basis of manipulating the market by not allowing trading of certain companies. Also, the Senate has called for an investigation on whether such restrictions were legitimate. We are certain to hear more of this for the weeks to come.
U.S. quarterly GDP was published last week. As expected, the economy grew by 4% on an annualized basis in the 4th quarter. 2020 total GDP shrank by 3.5% – the worst since WWII and the first since 2008, as published by WSJ. Retail sales weakened significantly in the 4th quarter, shrinking around 2.3%. The growth engine earlier in the year – goods spending – contracted. Spending on durable goods was flat. Notable shove came from residential fixed investment that was up 33.5% in Q4 (vs 63% in Q3). Ultra-low mortgage rates, as well as exodus of people leaving big cities due to COVID-19 set the stage in 2020 for the highest growth (+5.6%) in 14 years in existing home sales. Non-residential fixed investment was up 13.8% in Q4. It should also be noted that the median home price last year was U$ 300,000, Analysts expect U.S GDP to grow in 2021 around 4-5%, supported by additional U$900 billion fiscal spending that was approved late last year. U.S. debt to GDP ratio is currently near 130% (up from 108% a year ago), expected to grow to 133% by the end of 2021, according to the IMF.
S&P 500 and Nasdaq-100 were both in risk-off mode respectively losing -1.93% and -2.1%, at the back of Gamestop related volatility. Russell 2000 was down -1.6%. Gold was down 43 bps, while US dollar, measured as DXY, was up 38 bps. VIX exploded 51% to 33.1.
Have a great trading week ahead!