Conway’s QuickTake: Week of February 1, 2021
Here’s What Happened Last Week:
U.S. equities fell sharply for the week given the unusually heavy focus placed on short squeezes and status-quo comments from the Federal Reserve on the economic outlook. Dominating headlines throughout the week were interesting developments circulating around some individual stocks, most of which were small- and micro-cap companies. The most recognized were GameStop (GME) and AMC Entertainment Holdings (AMC). In short (pun intended), these two companies had a high level of short-interest, positions mostly taken from some large hedge funds in which they would profit if the stock prices fell. Some social media sites including Reddit displayed posts encouraging retail investors to buy large quantities of these stocks to drive their price higher. Consequently, the hedge funds were then required to buy back shares to cover their short positions adding fuel to the fire. For a brief period, some online brokerage sites even halted trading in such stocks or more practically required 100% margin collateral to purchase them. Another point worth mentioning is just how volatile these stocks were during the week. For reference, the market-cap of GameStop spiked to $24 billion on Wednesday, an increase of almost 2,000% of its market-cap from just three weeks ago while AMC Entertainment’s market-cap rose nearly 1,000%. Both companies retreated slightly to end the week at $22.7 billion and $4.5 billion respectively. Time will tell if this level of volatility is sustainable and the future of short squeezes. In the latest Federal Open Market Committee meeting on Wednesday, Chair Jerome Powell indicated the economic outlook remains uncertain and the existing amount of Central Bank asset purchases will persist for the time being. The fourth quarter GDP growth level also reported in at an annualized rate of 4.0%, much lower than a comparable 33.4% in the third quarter. Real estate led all sectors after a nearly flat performance week while energy lagged falling more than 6%. All size and style categories fell between 3.0% to 4.5% except for small-cap growth which plummeted 5%. Small-cap stocks remain in positive territory for the year thus far.
As briefly mentioned above, the U.S. gross domestic product grew at a 4% annualized rate but it was not enough to offset the large decline earlier in the year. Consequently, the reported GDP level contracted by 3.5% on a year-over-year comparison. This is the largest annual decline since the World War II era and the first since 2009. Reversing the Trump administration’s policy of leaving the choice to local leaders, President Biden recently issued an executive order that requires all people to wear masks on federal property and transportation across state lines. Then on Friday, the CDC issued a more specific mandate which requires anyone using any form of public transportation to wear a mask on the mode of transport and inside waiting hubs. This policy will go into effect on Tuesday. The filing of initial jobless claims fell to 847,000 through the week ended January 23rd. This is still well above the long-term pre-pandemic average but lower than the prior week’s level. The average U.S. household monthly income rose by 0.6% in December, the first increase in three months. This increase was likely attributed to some federal aid relief funds, such as recently distributed unemployment benefits. Household income should rise even further this quarter given the expected disbursement of $600 stimulus checks to qualified candidates.
Both international developed and emerging markets equities struggled mightily like U.S. stocks. European equities lagged given much of the same rhetoric, extended lockdowns, and delays in their vaccine distribution efforts. Despite a third economic stimulus package being passed in Japan totaling ¥19 trillion ($185 billion), Japanese equities fell in-line with European and U.S. stocks. Chinese equities fell hard, near 4% represented by the MSCI China Index, as asset flows transferred from mainland China to Hong Kong given a recent increase in arbitrage opportunities in dual-listed companies between the two locales.
A few European nations reported hopeful GDP figures for the fourth quarter which sparked the belief the eurozone may avoid a more severe recession. On a quarter-over-quarter basis, Germany’s economy grew by 0.1%, Spain’s expanded by 0.4%, and France’s shrunk by 1.3% which is not positive but much less than the forecasted 4.1% contraction. Complete eradication of the coronavirus will further boost these economies back to full strength. A Nikkei survey indicated about three-quarters of Japanese companies in 32 different industries reduced their capital expenditure plans by an average of 2.9% from initial estimates. The weakest industries lacking demand were air transport, rubber, and chemicals while auto-related sectors were among the strongest. China reported their industrial profits rose by about 4% in 2020 after a decline in 2019. China will soon celebrate its weeklong Lunar New Year holiday in mid-February and is expected to enforce widespread restrictions on traveling and gatherings to squash any further outbreaks.
Yields out the curve were slightly higher, with the 10-year yield back around 1.08%. Mid-week yields dipped around 1%. The spread between the 2-year and 10-year yield steepened to 97 bps. The spread between the 5-year and 30-year remained slightly unchanged around 140 bps. The corporate spread for the USD Investment Grade All Sector OAS was wider by 1 bps. Investment grade funds reported $6 billion of inflows while high yields reported $1.3 billion of outflows. One notable deal this week was 7-Eleven (Baa2/AA-), which issued an $11 billion deal in 8-parts. It garnered a peak interest book size of about $60 billion, tightened spread of 35 bps and was six-times oversubscribed. Municipals outperformed Treasuries on the week with benchmark yields 2-8 bps lower across the curve, moving ratios lower. Municipal funds recorded inflows of $2.79 billion for the week ending 1/27, the 12th straight week and the second longest streak on record.
Monday, February 1, 2021
•ISM Manufacturing Survey Results
•Euro Area Unemployment
Tuesday, February 2, 2021
•Euro Area GDP
Wednesday, February 3, 2021
•ISM Non-Manufacturing Survey Results
Thursday, February 4, 2021
•US Jobless Claims
Friday, February 5, 2021
•US Nonfarm Payrolls
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, Trading Economics, Goldman Sachs Weekly Market Monitor
Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.