Adrian A. Hedwig
Financial Advisor, CUSO Financial Services, L.P.
Available for virtual or phone meetings.
P: 206.607.3481
F. 206.299.9530
adrianh.cfsinvest@salalcu.org
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Quarterly Market Review: January-March 2021
As we closed out 2020, the overwhelming sentiment entering January was that it couldn’t get much worse. Unfortunately, January did not start out on a high note. During the first week of the month, protesters stormed the United States Capitol, leading to violence, the disruption of the presidential election certification, and several deaths. Nevertheless, the inauguration of Joe Biden as our 46th president took place as scheduled. January also saw the emergence of virus mutations, the uneven distribution of COVID-19 vaccines, and the gradual relaxation of pandemic-related restrictions. Also during January, a new phenomenon in stock price manipulation emerged involving several companies, including a video-game company. Ultimately, stocks closed the month mixed, with the Russell 2000 and the Nasdaq gaining, while the Dow and the S&P 500 fell. Treasury yields, the dollar, and crude oil prices advanced.
Major equity indexes reached record highs in February, only to pull back by the end of the month. Fearful that inflationary pressures would mount, investors favored value stocks over growth, pushing small-cap and mid-cap stocks higher. Investors were encouraged by President Joe Biden’s $1.9 trillion stimulus proposal, accelerated vaccine distribution, and better-than-expected fourth-quarter corporate earnings. By the end of February, each of the benchmark indexes listed here posted gains led by the Russell 2000, which advanced more than 6.0%. The yield on 10-year Treasuries continued to grow, crude oil prices pushed past $61 per barrel, and the dollar rose. Only 50,000 new jobs were added in February, although unemployment claims decreased.
Stocks continued to push higher in March. Several of the benchmark indexes posted noteworthy gains including the Dow (6.6%), the S&P 500 (4.2%), and the Global Dow (4.0%). The Russell 2000 (0.9%) and the Nasdaq (0.4%) advanced moderately. Among the sectors, industrials (8.1%), utilities (7.4%), consumer staples (6.5%), and materials (6.4%) led the way. Treasury yields and the dollar advanced, while crude oil prices and gold fell.
Overall, the first quarter was definitely eventful. Additional federal stimulus payments lined many pocketbooks; a group of amateur traders banded together through social media to drive shares of a video gaming company to astronomical heights; interest rates jumped, stoking fears that inflationary pressures were rapidly building; and equities ultimately enjoyed robust returns. The small caps of the Russell 2000 gained nearly 12.5%, the Global Dow climbed 9.4% and the large caps of the Dow (7.8%) and the S&P 500 (5.8%) posted solid gains. Tech shares, which had driven the market for much of 2020, slumped during the quarter, but still gained enough ground to push the Nasdaq up by almost 3.0%. Energy shares posted some of the biggest gains in the quarter, with that market sector surging over 30.6%. Financials jumped 18.0%, followed by industrials (12.0%), materials (10.8%), and real estate (10.0%). Only information technology failed to advance by the end of the quarter. The yield on 10-year Treasuries climbed more than 80 basis points. Crude oil prices increased and the dollar rose. Gold prices fell nearly 10.0% in the first quarter. Year to date, the Russell 2000 is well ahead of its 2020 year-end closing value, followed by the Global Dow, the Dow, the S&P 500, and the Nasdaq.
The price of crude oil (CL=F) closed at $59.32 per barrel on March 31, lower than the February 26 price of $61.50 per barrel but well above the December 31 price of $48.52. The national average price of retail regular gasoline was $2.852 per gallon on March 29, up from the February 22 price of $2.633 and 27.0% higher than the December 28 selling price of $2.243. The price of gold finished March at $1,708.40 per ounce, lower than the February 26 price of $1,728.10 per ounce and significantly below its December 31 closing value of $1,893.10 per ounce.
Stock Market Indexes
Market/Index | 2020 Close | As of March 31 | Monthly Change | Quarterly Change | YTD Change |
|---|---|---|---|---|---|
DJIA | 30,606.48 | 32,981.55 | 6.62% | 7.76% | 7.76% |
Nasdaq | 12,888.28 | 13,246.87 | 0.41% | 2.78% | 2.78% |
S&P 500 | 3,756.07 | 3,972.89 | 4.24% | 5.77% | 5.77% |
Russell 2000 | 1,974.86 | 2,220.52 | 0.88% | 12.44% | 12.44% |
Global Dow | 3,487.52 | 3,813.59 | 3.98% | 9.35% | 9.35% |
Fed. Funds | 0.00%-0.25% | 0.00%-0.25% | 0 bps | 0 bps | 0 bps |
10-year Treasuries | 0.91% | 1.74% | 28 bps | 83 bps | 83 bps |
US Dollar-DXY | 89.84 | 93.23 | 2.55% | 3.77% | 3.77% |
Crude Oil-CL=F | $48.52 | $59.32 | -3.75% | 22.26% | 22.26% |
Gold-GC=F | $1,893.10 | $1,708.40 | -1.31% | -9.76% | -9.76% |
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Month’s Economic News
- Employment: There were 379,000 new jobs added in February after only 49,999 new jobs were added in January. In February, the unemployment rate fell by 0.1 percentage point to 6.2%, and the number of unemployed persons decreased by 150,000 to 10.0 million. Although both measures are much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5% and 5.7 million, respectively). Among the unemployed, the number of persons on temporary layoff decreased in February by 517,000 to 2.2 million. This measure is down considerably from the recent high of 18.0 million in April but is 1.5 million higher than its February 2020 level. In February, the number of persons not in the labor force who currently want a job, at 6.9 million, was little changed over the month but is 1.9 million higher than in February 2020. The number of employed persons who teleworked in February because of the coronavirus pandemic edged down to 22.7%, 0.5 percentage point lower than January. In February, 13.3 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This measure is 1.5 million lower than in January. February saw notable job growth in leisure and hospitality (355,000), although employment in that area is down by 3.5 million over the year. Job growth also occurred in food services and drinking places (286,000); trade, transportation; and utilities (49,000); health care and social assistance (45,600); and professional and business services (63,000). The labor force participation rate was unchanged at 61.4%, and the employment-population ratio inched up 0.1 percentage point to 57.6%. Average hourly earnings increased by $0.07 to $30.01 in February and are up 5.3% from a year ago. The average work week declined by 0.3 hour to 34.6 hours in February.
- Claims for unemployment insurance continued to drop. According to the latest weekly totals, as of March 13, there were 3,870,000 workers receiving unemployment insurance benefits, down from the February 20 total of 4,419,000. The insured unemployment rate fell 0.4 percentage point to 2.7%. During the week ended March 6, Extended Benefits were available in 16 states (18 states during the week of February 6); 51 states and territories reported 7,735,491 continued weekly claims for Pandemic Unemployment Assistance benefits (7,518,951 in February), and 51 states and territories reported 5,551,215 continued claims for Pandemic Emergency Unemployment Compensation benefits (5,065,890 in February).
- FOMC/interest rates: The Federal Open Market Committee met in March. According to the Committee statement, employment has turned up recently and, despite investor concerns, inflation continues to run well below 2.0%. The Committee continues to hold interest rates at their current 0.00%-0.25% target range and expects no change through 2023.
- GDP/budget: The gross domestic product advanced at an annual rate of 4.3% in the fourth quarter of 2020. The GDP increased 33.4% in the third quarter after contracting 31.4% in the second quarter. Consumer spending, as measured by personal consumption expenditures, increased 2.2% in the fourth quarter after surging 41.0% in the third quarter. Nonresidential (business) fixed investment climbed 13.1% following a 22.9% increase in the third quarter; residential fixed investment continued to advance, increasing 36.6% in the fourth quarter after soaring 63.0% in the prior quarter. Exports advanced 22.3% in the fourth quarter (59.6% in the third quarter), and imports (which are a negative in the calculation of GDP) increased 29.8% in the fourth quarter (93.1% in the third quarter). Federal nondefense government expenditures decreased 8.9% in the fourth quarter following a third-quarter decline of 18.3% as federal stimulus payments and aid lessened. The GDP fell 3.5% in 2020 after increasing 2.2% in 2019. Personal consumption expenditures dropped 2.63%; nonresidential fixed investment declined 0.54%; residential fixed investment rose 0.23%; exports dropped 1.47%; imports rose 1.33%; and nondefense government spending advanced 0.15%.
- The federal budget deficit was a larger-than-expected $310.9 billion in February, following January’s $162.8 billion deficit. The deficit is 32.0% higher than the February 2020 deficit of $235.3 billion. The deficit for the first five months of fiscal year 2021, at $1.047 trillion, is 68% higher than the first five months of the previous fiscal year. Through February, government outlays, at $559.2 billion, were 32.0% above the February 2020 figure, while receipts, at $248.3 billion, also increased 32.0%. The increase in government expenditures can be traced to a 125.0% jump in outlays for income security, an 859.0% increase in commerce and housing credits, and a 26.0% rise in health outlays.
- Inflation/consumer spending: Inflationary pressures eased in February. According to the latest Personal Income and Outlays report, consumer prices edged up 0.2% in February after advancing 0.3% in January. Prices have increased 1.6% from February 2020. Excluding food and energy, consumer prices increased 1.4% over the last 12 months. Both figures are well below the Fed’s 2.0% target inflation rate. Personal income fell 7.1% in February after climbing 10.0% in January, and disposable personal income dropped 0.8% following January’s 11.4% jump. The decrease in personal income in February is more a reflection of stimulus payments received in January, which accounted for that month’s soaring income estimates. Consumer spending declined 1.0% in February after advancing 3.4% (revised) in January. Over the last 12 months, personal consumption expenditures (consumer spending) dipped 2.7%.
- The Consumer Price Index climbed 0.4% in February following a 0.3% rise in January. Over the 12 months ended in January, the CPI rose 1.7%. Gasoline prices continued to increase, rising 6.4% in February and accounting for over half of the CPI increase. Consumer prices less food and energy rose 0.1% in February. The CPI less food and energy prices is up 1.3% over the past 12 months. Food prices rose 0.2% in February after edging up just 0.1% in January. In February, prices for apparel fell 0.7% after climbing 2.2% the prior month. Prices for new vehicles were unchanged in February, while prices for used cars and trucks dropped 0.9% for the second consecutive month.
- Prices that producers receive for goods and services continued to climb in February, increasing 0.5% after advancing 1.3% in January. Producer prices increased 2.8% for the 12 months ended in February, which is the largest yearly gain since climbing 3.1% for the 12 months ended in October 2020. Producer prices less foods, energy, and trade services rose for the tenth consecutive month after advancing 0.2% in February. Food prices increased 1.3% in February after increasing 0.2% in January, while energy prices followed a 5.1% January increase by jumping 6.0% in February.
- Housing: The housing sector retreated in February, likely due to dwindling inventory. Nevertheless, sales of existing homes fell 6.6% in February after rising 0.6% in January. Over the past 12 months, existing home sales increased 9.1%. The median existing-home price was $313,000 in February ($309,900 in January), up 15.8% from February 2020. Unsold inventory of existing homes fell 29.5% from February 2020 and represents a 2.0-month supply at the current sales pace, slightly better than January’s 1.9-month supply. Sales of existing single-family homes also dropped 6.6% in February after advancing 0.2% in January. Year over year, sales of existing single-family homes rose 18.6%. The median existing single-family home price was $317,100 in February, up from $308,300 in January.
- New single-family home sales plunged in February. New home sales dropped 18.2% after climbing 4.3% in January. Sales of new single-family homes have increased 8.2% since February 2020. The median sales price of new single-family houses sold in February was $349,400 ($346,400 in January). The February average sales price was $416,000 ($408,800 in January). The inventory of new single-family homes for sale in February represents a supply of 4.8 months at the current sales pace, up from the January estimate of 4.2 months.
- Manufacturing: The manufacturing sector took a step backward last February as industrial production decreased 2.2%, the first such decline since last October. According to the Federal Reserve’s report, industrial production advanced 1.1% in January. Manufacturing output fell 3.1% in February following January’s 1.0% increase. Mining production dropped 5.4% in February after advancing 2.3% in January. February saw the output of utilities increase 7.4% after declining 1.2% the prior month. Total industrial production in February was 4.2% lower than its year-earlier level. According to the report, the severe winter weather in the south central region of the country in mid-February accounted for the bulk of the decline in output for the month.
- For the first time in 10 months, new orders for durable goods decreased, falling 1.1% in February after climbing 3.5% in January. Transportation, down following five consecutive monthly increases, led the decrease, sliding 1.6%. New orders for nondefense capital goods rose 5.6% in February after increasing 6.2% the previous month. A 103.3% increase in nondefense (commercial) aircraft and parts drove the jump in nondefense capital goods. Defense capital goods followed a 0.9% January decline by nosediving 10.6% in February.
- Imports and exports: Both import and export prices rose higher in February for the third consecutive month. Import prices climbed 1.3% in February following a 1.4% increase in January. Import prices rose 3.0% over the past year, the largest 12-month advance since increasing 3.4% from October 2017 to October 2018. Import fuel prices rose 11.1% in February following a 9.0% increase in January. The February rise was the largest advance since import fuel prices increased 15.2% in July 2020. Import fuel prices rose 6.5% over the past year, the first 12-month advance since a 13.2% increase in January 2020. Nonfuel import prices rose 0.4% in February following a 0.9% advance in January. Export prices increased 1.6% in February after climbing 2.5% in January. For the year ended in February, the price index for exports rose 5.2%, the largest 12-month increase since the index advanced 5.3% in June 2018. Agricultural export prices increased 2.9% in February following a 6.0% jump in January. Nonagricultural exports rose 1.5% in February after increasing 2.2% in January.
- In February, the international trade in goods deficit was $86.7 billion, up 2.5% over January’s deficit. Exports fell 3.8% and imports declined 1.4%. For the 12 months ended in February, exports have fallen 5.4%, while imports have jumped 10.1%.
- The latest information on international trade in goods and services, out March 5, is for January and shows that the goods and services trade deficit was $68.2 billion, 1.9% over the December deficit. January exports were $191.9 billion, or 1.0%, more than December exports. January imports were $260.2 billion, or 1.2%, more than December imports. Year over year, the goods and services deficit increased $23.8 billion, or 53.7%, from January 2020. Exports decreased $15.7 billion, or 7.6%. Imports increased $8.1 billion, or 3.2%.
- International markets: Inflationary pressures may be ramping up globally. February saw consumer prices increase in several nations, including France, Germany, Italy, Canada, China, and Japan. In the markets, the EURO STOXX Europe 600 Index gained about 4.1% in March; the United Kingdom’s FTSE inched up 1.1%; Japan’s Nikkei 225 fell 1.3%; and China’s Shanghai Composite Index plunged nearly 4.0%.
- Consumer confidence: The Conference Board Consumer Confidence Index® surged in March to its highest reading in a year. The index stands at 109.7, up from 90.4 in February. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from February’s 89.6 to 110.0 in March. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, rose from 90.9 in February to 109.6 in March.
Eye on the Month Ahead
The economy in general, and the stock market in particular, should continue to progress as more vaccines are rolled out and more jobs are made available. Investors will continue to watch for signs of escalating inflation, despite the Federal Reserve’s forecasts to maintain interest rates at their present levels through 2023.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuate with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
Money Market Funds in a Low Rate Environment
After pushing interest rates gradually upward for three years, the Federal Reserve dropped the benchmark federal funds rate to near zero (0%–0.25%) in March 2020 to help mitigate the economic damage caused by COVID-19.1 The funds rate affects many short-term interest rates, including the rates on money market mutual funds, which were already low to begin with.
The average monthly yield on 30-day taxable money market funds dropped steadily after the Fed’s move and was down to 0.03% by the end of 2020, equivalent to an annual percentage rate of about 0.36%.2 Considering the rock-bottom rates on some short-term investments, this is higher than might be expected but well below the rate of inflation.3 Even so, investors held about $4.3 trillion in money market funds.4
What’s the appeal with such a low return? Stability and liquidity.
Cash Alternatives
Money market funds are mutual funds that invest in cash alternatives, usually short-term debt. They seek to preserve a stable value of $1 per share and can generally be liquidated fairly easily.
Money market funds are typically used as the “sweep account” for clearing brokerage transactions, and investors often keep cash proceeds in the fund on a temporary basis while looking for another investment. In a volatile market, it’s not unusual to see large shifts into money market funds as investors pull out of riskier investments and wait for an opportunity to reinvest.
Short Term vs. Long Term
Money market funds can also be useful to keep emergency funds or other funds that might be needed quickly, such as a down payment on a home. If you are retired or near retirement, it might make sense to use money market funds for near-term expenses and/or to hold funds in a traditional IRA for required minimum distributions, so you do not have to sell more volatile assets.
For a long-term investing strategy, however, money market funds are a questionable choice. You might keep some assets in these funds to balance riskier investments, but low yields over time can expose your assets to inflation risk — the potential loss of purchasing power — along with the lost opportunity to pursue growth through other investments. This could change if interest rates rise, but the Fed projects that the federal funds rate will remain in the 0% to 0.25% range through the end of 2023.5
Source: Refinitiv, 2021, 30-Day Money Market Index — All Taxable, for the period 12/31/1999 to 12/31/2020. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1, 5. Federal Reserve, 2020; 2. Refinitiv, 30-Day Money Market Index — All Taxable, for the period 12/31/2019 to 12/31/2020; 3. U.S. Bureau of Labor Statistics, 2021; 4. Investment Company Institute, 2021 (data as of 12/29/2020).
GameStop, Reddit, and Robinhood vs. Investing for the Long Run
A discussion with John Owens, Senior Portfolio Manager, Select Equity Portfolios, and Mike Stout, Portfolio Manager, Active Asset Allocation.
Key Takeaways
The recent meteoric rise and spectacular fall of stocks like GameStop should not present major risks to most investors, we believe, but this market behavior is still concerning.
We view equity markets as a vehicle for investors to participate in the potential growth of companies whose stocks are attractively priced. Expecting massive, short-term price increases is speculation, not investing.
Young people with money to invest would do well to find a financial advisor who can help them develop a financial plan for their savings. Risky stock bets made to brag about on social media platforms might be more entertaining but won’t likely serve them well in the long run.
What happened with GameStop and other similar stocks recently in markets?
John Owens: Companies like GameStop GME and AMC Entertainment AMC, which had already been struggling for some time, were hurt by the pandemic, and their stocks suffered for it. Then, suddenly we saw these stocks spike tremendously, then fall spectacularly. It’s like watching the price of any speculative asset, like Bitcoin—the market can bounce around without much reason.
Specifically fueling the speculation around stocks like GameStop were individual traders. Not just any individuals. In fact, we see two trends here. First, social media like Reddit’s WallStreetBets and other platforms drove much of the trading on GameStop, according to reports. Some sought to squeeze short-sellers, while others were just hopping on a fast-rising stock in hopes it would keep going.
The other trend is the rise of cheap trading and apps like the one from Robinhood Markets, Inc., which adds gamification elements that we believe encourage more trading, especially among younger, inexperienced traders.
Consider this description of Robinhood by one 18-year-old: “You’re able to put it on your homescreen and flip between Instagram and Snapchat; it doesn’t feel as serious as it used to … . It’s just an app you open up on your phone, there’s graphs, and numbers, and it’s easy to understand and learn really quickly,” Zane Bannink, a high school senior in Wisconsin, told The Wall Street Journal. That doesn’t sound like a formula for success for a long-term investor.1
John, what are the implications for investors?
JO: Well, we don’t see major risks at this point for investors, but this is an unfortunate introduction to the market for a new generation.
Regarding risks, these are small stocks that, even after rising 1,000% or more, don’t constitute much of the U.S. market. Assuming their prices return to more normal levels, they won’t become part of major indexes. We expect these to be blips that don’t affect most investors.
That said, we’re somewhat concerned about the attitudes of some market participants, who seem to view stocks as get-rich-quick schemes. This perhaps started recently with the atmospheric rises of Bitcoin and Tesla TSLA stock, turning some folks into millionaires (at least on paper). Now there seems to be a hunt for the next pot of gold at the end of the rainbow. A Yahoo Finance-Harris Poll2 estimated that 28% of Americans bought a viral stock in January 2021—9% buying GameStop alone—with an average investment of $8,533.
We tend to see that type of next-pot-of-gold thinking rise just before a major market correction. That’s not to say this latest activity points to an imminent crash—to say so would itself be speculation.
Still, we’ve seen time and time again that many folks eventually end up losing everything when joining a speculative frenzy (e.g., Tulip mania in 17th Century Holland, and in the U.S., the Roaring ’20s, Nifty Fifty, dot-com bubble, Great Recession, etc.). This is especially true for novices buying on margin. To make matters worse, many losers often swear off making future investments and miss the potential for building wealth slowly with a more prudent approach.
My introduction to the equity market was quite different from this generation’s Robinhood and Reddit users. My grandfather introduced me to stock investing. He favored blue-chip stocks. We used to go to the mailbox to pick up dividend checks and then go to the bank together to deposit them. He’d periodically check the stock quotes in the newspaper, but really it was the dividends that mattered to him. Well before spreadsheets and the internet, he used to meticulously record in his journal all of his dividends for each company and then tally the grand total for the year and compare it to the prior years. He treated a stock like a stake in a business. With few exceptions, he was a long-term, buy-and-hold investor.
Today, I feel investors would be better off learning about the market in this manner, versus from Reddit users offering them get-rich-quick schemes or from a Robinhood app encouraging them to frequently trade stocks (not to mention options and cryptocurrencies) through the promise of free trades, push notifications, and bursts of digital confetti.3
Mike, how might this affect investors in our multi-asset portfolios, where we often hire third-party asset managers to oversee assets within our portfolios?
Mike Stout: We’re watching the Reddit WallStreetBets circus from a distance, certainly not participating, with an eye toward assessing whether this social-media-driven volatility is a new risk in the markets, or just the same thing we’ve seen in past manias (and 1999 Yahoo chat rooms) in a 2021 wrapper.
When hiring a third-party asset manager or fund, we look for portfolio managers who have years of experience and follow investment philosophies grounded in fundamental research, with the ultimate aim of figuring out companies’ true values. Neither they nor we are in the business of investing on the thesis that a greater fool might pay an even higher price for a moribund company’s stock bid up by a frenzied crowd—much less when the underpinning is a technical dislocation like a short squeeze.
Do you expect this type of frenzied traded to be regulated?
MS: I don’t know if regulation will follow—that’s a question for lawyers and policymakers. And of course, we don’t have any special information on this event and therefore can’t comment directly on it. Generally speaking, market manipulation is already against the law. Pump and dump is already prohibited. Collusion (even in a chat room) is already illegal. Regulators might take a look at the practice of brokerages selling their order flows to high-frequency trading firms, although Robinhood has cited a $3 billion margin call from the Depository Trust & Clearing Corp., which clears and settles trades, as the reason it decided to halt trading in GameStop.
How will investors navigate through this?
JO: We won’t treat the market like a game of Candy Crush. Rather, we’ll stick to our enduring philosophy and disciplined approach to investing. Just like my grandfather, we’ll aim to build wealth for our clients, not by frequently trading, but by seeking to be long-term owners of profitable and cash-generative businesses. That said, if the irrational behavior of others creates opportunities for disciplined, long-term investors like us, we will certainly try to seize them! From Warren Buffett’s 1987 letter to Berkshire Hathaway shareholders:
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Investing is challenging and markets are competitive. My colleagues and I aren’t right on every call we make, but we spend hours of dedicated research, analysis, and reflection on every investment we make.
We also employ our education, credentials, and years of experience, not to mention a small army of analysts at our disposal, in this endeavor. Even so, we humbly enter the ring (i.e., markets) with great respect for our opponents (i.e., other investors) while striving to maintain our independence. If individual investors are eager to step into the fray, so be it. But generally we think times like these underscore why they (especially novices) should consider hiring a financial advisor who can recommend an appropriate, professionally managed portfolio that will help them reach their financial goals.