Market Update

The primary focus of the week for us revolved around the monetary policy meeting of the US Central Bank. Recent discussions in the market have been centered on when the Federal Reserve would initiate the tapering of its QE program (bond purchases) and raise US interest rates in light of the economic recovery since the challenging days of Q2 last year.
Fortunately, the Federal Reserve's actions aligned with our expectations. They decided to keep interest rates steady at 0.25%, and policymakers clearly stated that it was too early to broach any discussions about tightening monetary policy.
As we've emphasized in previous commentaries, the US economy is still a considerable distance away from meeting the Federal Reserve's targets for inflation and employment. Additionally, stricter lockdowns, which shuttered businesses like pubs and restaurants, have led to some recent economic data from the US, such as December's non-farm payrolls and retail sales figures, indicating a slowdown in the recovery.
Furthermore, we firmly believe that the size and duration of stimulus measures matter. The risks associated with implementing substantial and long-lasting monetary stimulus are far lower than the consequences of being too conservative and brief. It's worth noting that after the global financial crisis of 2008/2009, the Federal Reserve did not raise interest rates for seven years.
Therefore, we view the ongoing speculation in the market regarding tighter monetary policy as premature. It is highly unlikely that the Federal Reserve will commence tapering its QE program within the next 12 months, and even when it does, the tapering process will be gradual. As for interest rates, we anticipate any increase to be several years down the road.
Regrettably, despite the positive outcomes of the Federal Reserve meeting, the equity markets did not perform well during the week, as illustrated in the accompanying table.
This was primarily due to the chaos surrounding several heavily "shorted" US companies, such as GameStop, a retailer of new and used games consoles and software. The shares of these companies experienced extreme fluctuations after a subgroup of Reddit users known as "WallStreetBets" initiated a coordinated buying campaign.
Shorting involves borrowing shares from a shareholder to sell them on the stock market, with the expectation of repurchasing them at a lower price later, before returning them to the original shareholder. While shorting is more intricate than this explanation, the basic concept remains the same.
GameStop was a favored stock for hedge funds to short, as they believed the company would follow the path of many traditional retailers, like Debenhams or Blockbuster, succumbing to the digitalization of video game distribution. The collective buying efforts by Reddit users caused GameStop's share price to skyrocket, prompting hedge funds to cover their short positions and attracting more retail investors.
This led to a "short squeeze," where GameStop's shares surged from $65 to $325 during the week, reaching as high as $483 at one point (Thursday, January 28, 2021), compared to being valued at less than $20 just over two weeks ago.
While the frenzy was captivating to observe and dominated business news, such extreme share price movements are unhealthy. GameStop's share price now bears little connection to the underlying fundamentals of the business. As Benjamin Graham, an influential economist and investor, famously noted, the equity market behaves as a voting machine in the short term but as a weighing machine in the long term, indicating that emotions can cause share prices to overreact to information, but fundamentals ultimately prevail.
Fortunately, GameStop's market capitalization of $25 billion is too small to trigger any significant disruptions in financial markets.
In other developments during the week, US Q4 GDP growth was reported at an annualized rate of 4%, the Federal Reserve's preferred inflation gauge, the PCE, stood at 1.3% in December (indicating a lack of inflationary pressures), US personal spending declined by 0.2% in December (with November's reading revised down by 0.7% due to coronavirus restrictions), and US jobless claims fell more than expected, which is positive news.
Looking ahead to the upcoming week, there are several key economic indicators and events to monitor. In the US, these include ISM data, factory orders, weekly jobless claims, and employment figures such as non-farm payrolls, the unemployment rate, participation rate, and average earnings. Additionally, there will be Chinese PMI data, UK Q4 GDP figures, UK CPI inflation data, and a UK Bank of England monetary policy meeting.