The Stock Market Is Strange, But Not Broken

Our research shows the GameStop controversy is localized in stocks. This has been a strange week. Never before has social media been used to move large chunks of the stock market and rattle parts of the thick-skinned hedge fund industry. In our view, professional traders are reducing their equity exposures given the unpredictability of what’s happening, which undercut the broad stock market indexes this week. During such times of volatility, Horizon Investments focuses on whether the ripples will turn into a wave of risk aversion that engulfs bonds, currencies, emerging markets or high-yield debt. Our Market State monitor (see below) gives no indication of that yet. The correlation of moves across asset classes in the short-term is still low relative to the long-term (that’s indicated by a reading below zero). In other words, the world’s markets are still going their own ways, showing that this remains a localized stock market problem and not a systemic issue.

The other pieces of news supportive of markets:

  • U.S. financial conditions remain easy due to the Fed’s low interest rates and asset-purchase programs.
  • Vaccinations continue to grow, meanwhile Johnson & Johnson’s experimental vaccine is a clinical success.
  • Covid-19 cases are trending back down, and New York City is re-opening indoor restaurant dining.

We’d be worried if….

  • Signs of stress show up in markets outside of stocks – so far, there are no signs of trouble.
  • Signs of forced selling appear as risk managers at firms protect assets; that could indicate deeper, longer-lasting and widespread pain
  • Equity sentiment gauges become even more bullish. Coming into this week, there was some bullish froth. But the gyrations caused by the GameStop battle caused active managers to step back after being leveraged long the prior two weeks, according to the National Association of Active Investment Managers.

Americans still face a tough job market. Lost in the GameStop mania was a troubling sign of how difficult it is for many Americans to find work. That message will likely be reinforced by next Friday’s jobs report where expectations are for very little hiring. The indicator we’re talking about is the Conference Board’s percentage of people who say jobs are hard to get. For the second month in a row, that number is higher than those saying work is easy to find.

Chairman Jay Powell has got you covered. The Federal Reserve’s response to the weak job market: stick with ultra-easy monetary policy. Powell reiterated his promise not to raise rates in order to help millions of Americans get back to work. In our view, monetary policy here, and across the world, should remain easy for years to come – but we also see that policy locking bonds into a very narrow trading range (see the latest Big Number report). The side benefit of low rates is that, no matter the twists and turns of the GameStop saga, we expect easy monetary policy to be supportive of asset prices in the medium term.

What to Watch This Week

  •  Deluge of earnings: This is not the focus of markets, but it should be as it could be the basis of potentially further gains. 32% of the S&P 500 reports earnings this week, including Exxon Mobil, Google-parent Alphabet, Amazon, Amgen, UPS and Ford; with another 31% of the index reporting results the following week, including Walt Disney, Coca-Cola and General Motors.

  • GameStop investigations and stimulus bill politics: The focus of lawmakers is quickly shifting to investigating the GameStop controversy and the regulations governing markets. Where that leads is not obvious at this early stage. The controversy could impact the speed at which a new economic stimulus deal is worked out. Democrats can use the budget reconciliation process to pass their proposal containing new stimulus checks, something that may eventually find its way into equities.

 

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This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.


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