● S&P 500 drops, volatility pops. After starting the month strong, global equity markets mostly gave up their gains as the month ended. The last week of January was the worst week for the S&P 500 since October and January was its first negative month in since October. Volatility (VIX) jumped from 21 to 37.
● Taxables drop, munis pop. The Bloomberg Barclays U.S. Aggregate Bond Index also fell for the first time since October with its worst decline since August. Municipals rose for the fourth time in five months as muni spreads fell to their lowest since January 2019.
● Inflationary Recovery. The strong rebound from the depths of the coronavirus lockdowns last spring has set up economic output and corporate earnings to surge in 2021. But suddenly it looks like inflation might as well, and after laying dormant for years numerous price gauges now accelerating.
● ♪ Short people got no reason ♪ Retail traders using online message boards spurred a spike in the share prices of little‐known companies whose shares were heavily shorted by hedge funds, which caused some equity market turmoil at the end of the month.
Asset Class Performance
January started strong, feeding off November’s and December’s momentum, but faded as the month progressed and eventually most asset classes declined except for high yield bonds, U.S. small caps and emerging markets equity.
Well, that escalated quickly… short‐sellers got crushed in January
It takes a lot to push COVID‐19 from the top of the headlines. Other than the Presidential election and the inauguration of the new administration almost nothing else challenged the pandemic as the top story. But that all changed in January. Sure, the pandemic and the incoming Biden administration were the focus for the first few weeks of the month, but then a mania developed over some little‐known companies that captured the attention of virtually all media outlets, both financial and mainstream. Each month at the back of this publication, we chronicle the equity themes that tend to define the market’s behavior. For the six to seven months following the initial March and April coronavirus lockdowns, the dominant equity style themes were Growth over Value, Large Caps over Small Caps, and U.S. over International. But in the fourth quarter, stocks started to go through a ‘regime’ change as those themes reversed and Small, Value, and International outperformed for several successive weeks following news of several promising vaccines arriving. Coming into 2021, many forecasts called for that new market regime to persist on the predication that the vaccines would live up to their trial success rates and could be broadly and rapidly distributed. This ‘inflationary recovery’ phase seemed to be taking hold in the early stages of 2021 as well. But then, seemingly out of nowhere, a GameStop stock craze became a national, and ultimately a global, phenomenon making the “most‐shorted stocks” the only style that mattered. GameStop was a struggling retail store that sells physical video games and consoles. Many hedge funds saw GameStop as the video game equivalent of Blockbuster Video, which effectively died as more and more movie consumers shifted to steaming services and digital downloads. The hedge funds made massive bets that GameStop’s share price would fall (i.e., they shorted the stock). Meanwhile a sizable contingent of retail speculators used online chat rooms to coordinate buying shares of GameStop, and other heavily shorted stocks, forcing the share prices higher and inflicting large losses on the hedge funds. The story went viral and made its way to the frontlines of mainstream news outlets. As seen in the lower left chart, the Goldman Sachs basket of the 50 most‐shorted companies in the Russell 3000 Index soared +42% in January, its best month ever. Hedge funds were forced to sell other positions to pay for the stocks they shorted. All the buying and selling caused the Cboe Volatility(VIX) Index to almost double from about 21 on 1/21 to more than 37 on 1/27 (1/27 was the third largest 1‐day spike in history). This caused a great deal of speculation that a structural market crash may occur. But that threat was never corroborated by other asset classes. Bonds spreads didn’t move at all and remained near all‐time lows (see the chart above). Likewise, the bond volatility index (ICE BofA MOVE Index) barely budged going from about 43 to 47 over the same period as the VIX spike.
Bottom Line: Like most manias, the GameStop craze will be another flash in the pan. At the time of publishing this, GameStop had already dropped about ‐75% from its 1/27 high. The moral of the story is that compounding one’s wealth is not a game and when done prudently occurs over decades with a properly diversified portfolio, not over days with concentrated positions in highly speculative stocks.
Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds June be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
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