It is common for people watching the same event often to see different things. That’s why detectives separate witnesses when gathering statements. That seems to have been the case last week when share prices of a few companies experienced tremendous volatility.
Some cast the events as a David vs. Goliath morality tale. However, Michael Mackenzie of Financial Times saw it differently. He wrote, “…a speculative surge from retail investors using borrowed money…has in the past signaled a frothy market top.” (In financial lingo, a market is ‘frothy’ when investors drive asset prices higher while ignoring underlying fundamentals.)
No matter how you characterize it, the events of last week were unusual. Felix Salmon of Axios explained, “Almost never does a stock trade more than twice its market value in a single day…It has happened 7 times this week already, and 20 times this month…What we’ve seen in the past month, and especially the past week, is certain companies becoming little more than vehicles for short-term gambling.”
While the social-media-driven trading spectacle was fascinating, it will catch many traders with unexpected tax liability. Further, it overshadowed other substantive news that may affect more companies over a longer time frame:
The Federal Reserve left interest rates unchanged near zero. Fed Chair Jerome Powell indicated rates will remain low until jobs have recovered, even if inflation moves beyond the Fed’s target rate, reported Joy Wiltermuth and Andrea Riquier of MarketWatch.
The economy continued to grow during the fourth quarter of 2020. The Bureau of Economic Analysis reported gross domestic product (GDP), which is the value of all goods and services produced, increased from the third to the fourth quarter of 2020. The pace of growth slowed significantly from the third quarter as the coronavirus continued to interfere with economic activity.
A highly anticipated vaccine proved less effective than anticipated. Markets responded negatively to the news that a Johnson & Johnson single-shot vaccine was only 66 percent effective globally. The value of the vaccine is greater than the statistic suggests, according to experts cited by Ben Levisohn of Barron’s. The shot, “…prevented severe symptoms in 85 percent of patients, meaning that even those who caught the virus had cough, sniffles, and fevers but avoided the worst outcomes…”
Company earnings in the fourth quarter were better-than-expected. On Friday, John Butters of FactSet wrote, “Overall, 37 percent of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 82 percent have reported actual EPS [earnings-per-share] above estimates…” It is important to remember that estimates have been lowered every quarter since mid-2018. Actual earnings are expected to be -7.8% for the quarter with revenues less than a year ago by -1.2%.
Last week, major U.S. stock market indices finished lower.
Expressed opinions of pent up demand as a catalyst for recovery in the coming months may be much weaker than anticipated. Household payroll supplement and taxpayer capitalism for corporations to avoid reorganization have pulled spending forward.
“Deferred demand” was weakened by allowing households and businesses to avoid hard decisions typical of contractions. Biden’s initial actions and proposals will extend multiple areas of payment forbearance. Small businesses, responsible for 70% of employment, continue reducing capital expenditure plans.
Hope does not expand the economy, but business expansion does by direct and indirect increases in employment.