Week ending 29th January 2021.

For us, the main story of the week was the US Central bank’s monetary policy meeting.

This is because recent market chatter has increasingly been about when the Fed would begin to taper its QE program (bond purchases) and increase US interest rates given the economic recovery since those dark Q2 days last year.

Thankfully, not only did the Fed leave interest rates unchanged at 0.25% as we expected, but policymakers also made it clear it was too early to discuss any monetary tightening.

As we have previously highlighted in these commentaries, the US economy is a long way from the Fed’s inflation and employment targets – and due to stricter lockdowns, which closed pubs and restaurants, some of the recent economic data coming out of the US (such as December’s non-farm payrolls and retail sales) have shown signs that the recovery is starting to slow.

Furthermore, when it comes to stimulus, we believe size and duration matter:  as the risk of going big and long with monetary stimulus is far less than being too small and short – and it was worth noting that after the 2008/9 global financial crisis, the Fed didn’t increase interest rates for 7 years!

Consequently, we believe all this market chatter about tighter monetary policy is completely premature as the Fed is very unlikely to start tapering its QE program in the next 12 months and even then, any tapering will be slow and gradual – and as for interest rates, we believe any increase is many years away.

Unfortunately, despite this positive Fed meeting, as you can see from the accompanying table, equity markets didn’t have a great week.

Predominately, this was due to the circus surrounding a number of heavily ‘shorted’ US companies, such as GameStop (which sells new and used games consoles and software) as shares in these companies went on a wild ride after a sub-group of Reddit users called ‘WallStreetBets’ effectively started a coordinated purchase of shares in these companies.

Shorting is effectively where one borrows shares from a shareholder so they can be sold on the stock market, on the expectation that one will be able to buy the shares back later at a cheaper price, before they are returned to the underlying shareholder.

Shorting is a little more complicated than this – but hopefully you get the gist.

The US company GameStop was a popular stock for hedge funds to short, believing the company would go the same way as many bricks-and-mortar companies, such as Debenhams, or Blockbuster for those old enough to remember video rental shops, thanks to the digitisation of video game distribution.

The coordinated buying by Reddit users pushed GameStop’s share price up, which in turn forced a number of hedge funds to start buying back the shares they previously sold in order to limit their losses.  This in turn attracted more retail investors to jump on board and more hedge funds to start to cover their positions.

Consequently, in what is known as a ‘short squeeze’, GameStop’s shares rose from $65 to $325 over the week (having been as high as $483 at one point yesterday, Thursday 28 January 2021 and was less than $20 just over two weeks ago).

While the frenzy was absolutely mesmerising to watch (hence why it has been all over the business news), this sort of share price movement is unhealthy, as GameStop’s share price is now completely disconnected from the underlying fundamentals of the business.  As Benjamin Graham (an influential economist and investor) famously stated, the equity market is a voting machine in the short term, but a weighing machine in the long term – i.e. fickle emotions can cause a share price to overreact to information, but eventually the fundamentals win out.

Thankfully the company’s $25bn market capitalisation means that this is too small to cause any significant financial market disruption.

Elsewhere this week, US Q4 GDP growth came in at an annualised rate of 4%; the Fed’s preferred inflation measure, the PCE came in at 1.3% in December (which confirms to us that there are currently no inflationary pressures); US personal spending fell 0.2% in December, while November’s reading was revised down to a decline of 0.7% (reflecting the coronavirus lockdown restrictions); and US jobless claims fell by more than expected (which is good news).

Looking ahead to the coming week, from the US we have ISM; factory orders; the weekly jobless claims; and employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings).  Elsewhere we have Chinese PMI; UK Q4 GDP; UK CPI inflation; and a UK BoE monetary policy meeting.

Investment Management Team