The Vantagepoint Market Perspective: Chaos and Order

02/03/2021

 

While the GameStop saga has captured headlines during the past week, it’s important to remember that this kind of behavior — an attempted short squeeze — has gone on for years with various hedge funds on either side of the battle. The interesting twist this time is the involvement of a group of individual, retail investors who banded together via social media — primarily on Reddit’s WallStreetBets page — to join the fight.

As background, when an investor shorts a stock, they borrow shares that they then sell, with the condition that they will later buy an equal number of shares at the updated going market rate, so that they can repay their loan of the shares. In doing so, they’re effectively betting that the stock’s price will fall and that they will be able to buy it back at a lower price than they sold it at and pocket the difference. This strategy is fairly common and some large hedge funds attempted this tactic by taking a short position in GameStop.

The glitch in the hedge funds’ plan arose from the surprising number of individual investors who rallied together via social media to buy the stock and — albeit briefly — drive it up to nosebleed levels, only to see it tumble in the days that followed. For an idea of the range of the frenzied price swings, GameStop jumped from $43.03 a share on January 21 to as high as $483.00 a share on January 28. As of the close on February 2, the stock stood at $90.00 a share.

Along the way, they’ve forced at least one hedge fund, Melvin Capital, to turn to other hedge funds for a bailout, necessitated after the hedge fund apparently fell over 50% in January. Many of those individual investors were buying and selling GameStop using the Robinhood app, which has become wildly popular during the past year, particularly among retail investors who have flocked to the markets amid the COVID-19 lockdowns.

Last week in the midst of the chaos, Robinhood restricted the ability of its clients to buy GameStop and other stocks. And other brokerages followed suit, implementing similar limitations.

Investing Versus Gambling

What we find most interesting is that, aside from the movie-like drama, this is the first time we can recall when individual investors have joined together to effectively employ large-scale trading strategies that were previously solely the realm of institutional investors like hedge funds. Even if they don’t leave the field with profits, they have likely permanently altered the use of an aggressive short strategy for large institutional investors, such as the one deployed by hedge funds in GameStop and other stocks.

But it’s also important to make a distinction between investing and gambling. Based on what many of these participating individuals are saying online, they’re willing to lose the money they’ve allocated to GameStop to make a point and/or because they value the possible upside payoff for the risk they’re taking. Individuals can certainly make this choice, but as they say with gambling, you should make this choice only if you can afford to lose it all.

Still, while investing in one-off long shots may be thrilling or entertaining, it’s not consistent with a steady, long-term investment approach. We believe that it’s prudent for those who are saving for retirement to have the bulk of their assets follow a strategy that’s consistent with long-term saving and investing.

In most cases, this includes longer-term strategic allocations and asset class diversification. And for many defined-contribution investors, the most straightforward implementation of these strategies is often found by allocating their retirement savings to traditional mutual funds or collective investment trusts (CITs) that are available in their defined-contribution plans.

It’s also worth noting that GameStop’s price action in recent days has been divorced from its fundamentals, i.e., changes in its earnings, sales, or other measurements that traditionally affect a stock’s prospects and market value. Rather, it’s the dynamics of those trading it, particularly the large amount of short interest in the stock, that has had the most impact on its share price.

In our view, such investing is inconsistent with the goals of those saving for retirement, who should be looking at the market and investing through a long-term, rather than a short-term, lens.  

Bridging the Political Divide

Another interesting aspect of the GameStop/Reddit/Robinhood story is that the populist undercurrent that’s driving it seems to stretch across the political realm. The GameStop phenomena and the limiting of trades by the Robinhood brokerage are among the few issues that have managed to bring together Elizabeth Warren, Alexandria Ocasio-Cortez, and Ted Cruz to effectively declare that individuals should be free to trade. It speaks to an institutional order that is increasingly being called into question by a wide range of populists across the political spectrum. It’s not left versus right. It’s power versus no power. 

That dynamic has been at play in the last several years in many different arenas. This is just the first time that it’s reached the Wall Street establishment in a tangible way with market implications, that even the Occupy Wall Street movement a few years ago couldn’t achieve.

Order on the Political and COVID-19 Front?

Meanwhile, some semblance of order seems to have manifested itself in Washington, D.C. The new presidential administration appears to be quickly getting down to business and methodically implementing new policies that haven’t involved the social-media-driven dramas between Congress and the executive branch that had been common in recent years.

Indeed, in recent days, both Democrats and Republicans in Congress have been meeting to try to come to an agreement on a stimulus package that will be palatable enough to both parties to gain passage.  

On the COVID-19 front, the number of vaccinations being administered has been steadily increasing. Earlier this week, according to stats from Bloomberg, 26.5 million Americans had received one or both doses of the vaccines, which is greater than the 26.3 million people in the country who have tested positive for the virus. And that is definitely an encouraging sign.

In the broader stock market, January was essentially a wash, albeit with headlines dominated by volatility. Historically, the market has climbed in the leadup to a presidential inauguration, then retreated after the new president is sworn in. 

And this year was no different, even if the journey felt bumpy along the way. For example, the S&P 500 — often used as a proxy for the broader market — finished January nearly flat. Still, it’s important to take a medium-term look at its progress since the March 2020 lows to realize that even intense rapid downturns may not ultimately have much of an impact on any given year’s performance.  

Indeed, normalcy could return this year in the form of a fading pandemic, a better-functioning political system, and financial markets that perform in a conventional fashion with valuations that reflect an improving, post-pandemic economy. Or, more chaotic conditions might persist with COVID-19 variants stubbornly extending the pandemic’s impact, an impeachment trial that derails tentative bi-partisan progress, and the GameStop scenario proving to be a rule, not an exception.

In either case, we continue to emphasize that investors saving for retirement must endeavor to look through bouts of short-term volatility and focus on long-term horizons and goals. 

 

Disclosures:

This information is intended for institutional use only and is not intended for individual investors or the general public. This article includes links to external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Investment Only (IO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Investment Only (IO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.