02 February 2021
Wall Street vs. Reddit
It’s likely that many of us wouldn’t have heard of US video game retailer GameStop until last week, when it hit headlines for being at the centre of a global financial controversy, with billions of dollars at stake.
Like many recent disruptive events, the tale began in 2020, when an amateur investor shared a theory online that GameStop’s stock price was due a comeback. They posted this on popular online message forum, Reddit – where amateur investors often share stock tips on the ‘r/wallStreetBets’ thread, which has millions of members, many of which invest through low-cost trading apps on their mobile phones.
The investor also went a step further – predicting that if enough of the forum’s investors bought GameStop’s stock, then certain hedge funds that had bet heavily on the stock price’s decline would be forced to cut their losses by buying shares themselves, driving the price even further upwards. Millions of r/wallStreetBets members got on board, rocketing GameStop’s share price from under $20 in early January to over $500 at certain points last week. The price continued to swing wildly as various platforms halted trading for the stock, citing “complications”.
A major debate was soon underway. Many of these small investors, plus a few public figures, were angry that trading had been halted temporarily on the stock. They argued that large investors and platforms were conspiring against the plucky underdogs.
Indeed, the saga raises some interesting questions about the future of financial markets. What further impact could millions of small investors have if they keep acting together? Is there anything that regulators could do to prevent them, and should they even try? Wall Street’s regulator appeared to be siding with the investors towards the end of the week.
Volatility can mean opportunity
The longer-term ripples of the GameStop drama will be interesting to watch. Most immediately, though, the wave of commotion caused a knock-on effect on markets, including those more widely, with plenty of ups and downs.
The VIX index – aptly nicknamed the ‘fear index’ – measures how much volatility the market expects in US stocks over the next month. It unsurprisingly jumped last week – rising the most in one day since markets dropped back in March last year.
While it can be unsettling to read about ups and downs in the market, savvy investors should remember that it’s important to keep an eye locked firmly on the future. We need to find a way to temper our fears and resist the temptations of short-term gains, certainly in the context of our investment strategies. A split second of doubt could see you crystallise a decision you otherwise would not have made, and that decision might have unintended consequences.
What’s more – volatility can create opportunity. These movements allow fund managers to capitalise on valuable openings, says Tye Bousada, Founding Partner, President and Co-CEO at EdgePoint, a fund manager for St. James’s Place. He adds:
“This isn’t the first time that we’ve been through extreme volatility. The cause of this volatility is obviously different, and six months from now we’re going to have another cause. But when these dislocations happen, if you’re in a position of strength, you can take advantage of them.”
The fight against COVID-19 continues
While GameStop led the show last week, the background music of the markets is still the same. The COVID-19 pandemic, and the world’s recovery from it, is the single biggest factor impacting investments.
And, with so much resting on vaccine rollouts, disputes over supplies may be a feature of the year to come. Last week, a row escalated between the European Commission and UK drug-maker AstraZeneca. The company has cut supplies of its vaccine to Europe due to production delays in some of its European production spots. European officials asked the company to make up the shortfall with doses made in the UK. However, the company says its UK contracts prevent it from doing so. The EU suggested it might prevent vaccines entering Northern Ireland in response, although it later backtracked.
Naturally, many people are beginning to look to the future now that the recovery is in sight. Although last week contained both good and bad news regarding vaccines, most market participants are expecting the world to continue recovering this year. In countries that have endured lockdowns, people will resume spending money and driving the economic recovery once they are able to, suggested Artemis, manager of the St. James’s Place UK & International Income fund:
“We have yet to meet (remotely of course) anyone who wants to spend more time at home over the coming months. We have yet to meet anyone whose list of what they want to do doesn’t include travel, eating out, visiting a pub and meeting family and friends.
“We have no foresight as to when this pandemic will end, but when it does, we believe consumers will resume their fondness for socialising and travelling. And, of course, given the significant decline in business, the number of players in these industries has reduced; so those remaining will gain more.”