The market is driven by companies with good fundamentals and a track record of solid growth, right? Typically, yes, but things were flipped upside down this week. Unattractive companies, such as GameStop and AMC Theatres, skyrocketed with some help from modern-day “Robin Hoods”, while established companies reported solid earnings numbers but still saw share prices fall. Additionally, many economic indicators alluded to the fact that markets may be slowing down as we make our way further into 2021.
1.) Reddit Takes Over Wall Street – Users of the popular internet message board Reddit banded together to artificially inflate the stock prices of a few seemingly undesirable stocks. These investors targeted companies who were being “short sold” by large hedge funds, and aggressively invested in those names. Short selling is where an individual (or institution in this case) borrows shares of stock and sells the borrowed shares at market price. Ideally, the stock will continue to decline, the shares are repurchased at a lesser price and the investor pockets the difference. By pouring money into these undesirable stocks, these vigilante investors accomplished two things:
They sabotaged the short-selling activity of major hedge funds, costing them billions of dollars.
They caused the stock prices of these companies to ascend rapidly, making themselves a great deal of money in the process. GameStop stock was up as much as 1,000% this week, while AMC stock was up more than 300%.
Trading activity on some of these stocks was temporarily halted, and many institutions are demanding an SEC investigation into the activity. In the meantime, we will wait and see if any more Wall Street laggards are targeted by these rogue investors.
2.) Earnings Season Continues with Big Tech Names – Many major players in the technology world reported earnings this week, including Facebook, Microsoft, and Apple. All three of these companies beat expectations and showed promising growth in important segments and regions. However, the stellar performance was met with mixed reviews. Microsoft stock has performed well this week, but as of the close of the market on Thursday afternoon, both Facebook and Apple stock prices were down for the week. This lack of correlation between company fundamentals and share price performance is something to continue to monitor.
3.) LEI Slowdown – The United States Leading Economic Index, a metric used to indicate business-cycle peaks and valleys, rose by only 0.3% last month. By contrast, the growth from the previous two months was 0.9% and 0.7%. The LEI measures indicators such as manufacturing numbers, unemployment data, and building permits, and is usually a good predictor of future economic growth. A slowdown in index growth may be an indication that the economy could be due for a slight deceleration as well.
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