January 2021: Market Review
Mixed Equity Performance for the Markets
The first month of 2021 ended with an audible thud. The S&P 500 finished 1% lower after rising for most of the month only to stumble 4% in the last three days of January. Trends that began during the recovery rally of 2020 persisted with small caps outperforming large caps; value stocks beating growth and higher beta stocks leading lower-volatility stocks. Large cap technology stocks helped push the NASDAQ to a 1% gain on the back of strong earnings in the sector.
When Will the Game Stop?
With all due respect to the presidential inauguration and the rollout of multiple vaccines, the big story in January was undoubtedly the buying frenzy in heavily shorted names. WallStreetBets, a group of amateur traders on social media site Reddit, started pumping up prices in previously flailing stocks such as GameStop (up 1,575%) and AMC (up 480%) creating a short squeeze that put large hedge funds in serious peril.* Although it was interesting to see such names skyrocket higher, questions arose about the increasing use of leverage by retail investors and the implications on the markets overall if said investors decide to suddenly withdraw their participation. Despite the large amounts of press coverage from this phenomenon, retail investors in all their power still only represent a small portion of daily trades in the market. The real concern is that large market drawdowns are usually preceded by mass bouts of euphoria among average investors. Put/call ratios, a measure of the market’s risk appetite, have fallen to levels not seen since the Dot-com bubble of 98-99.
*Waycross does not currently hold any positions in GME or AMC.
The Fed is Sitting Tight on Staying Loose
The Federal Reserve indicated it has no plans for change in the near future, opting to keep rates at near-zero levels for the indefinite future. Fed Chairman Jerome Powell highlighted the declines in business activity from additional COVID surges as further evidence that the economic rebound is still on slippery ground. He further suggested that any improvement in economic metrics would be viewed as transitory by the central bank and committed to continuing a very accommodative policy for what many analysts believe will be at least two years. Historically, markets have benefited from dovish Fed stances, which means investors may have the tailwind of extremely low rates and unrestrictive policy to help continue pushing the market higher.