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January 2021 Monthly Review

"Even the Losers Get Lucky Sometimes"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

The above title comes from the late-great Tom Petty, from the 1979 album, "Damn the Torpedoes". The single was never released in the United States, but over the years has become one of the highest regarded songs of Tom Petty’s repertoire. 

In the month of January, several of the “loser” stocks got lucky and soared to painful heights for those that bet against them. In the first half of the month, Joe Biden was sworn in as our 46th president, we saw an uneven Covid-19 vaccine rollout, and virus mutations dominated the headlines. 

The last half belonged to the story of Robinhood (not the children’s story), GameStop, AMC, and other stocks that were teetering between solvency and relevancy. Robinhood is the trading app preferred by the younger crowd and, through a Reddit sub-group, was the foundation of an army of retail investors buying GameStop and other stocks that were heavily shorted by institutional investors and hedge funds. 

The media played it out as a “David vs Goliath” scenario, little guy versus big guy drama. In many ways, that characterization was fairly accurate. Through the social media app, a group of like-minded day traders banded together to push GameStop, a stock that ended 2020 below $19 and had negative earnings, to a high of nearly $500 a share in the last few trading days of January. Several hedge funds took billion dollar hits as they scrambled to cover their short bets…as the national media and long-time market observers were gob-stocked. 

We do not have enough room in this summary to go into the myriad of details surrounding this market phenomenon, but we are always concerned with events or circumstances that can have more long-lasting effects on our markets. It remains to be seen if additional regulations come from this, but we will continue to monitor. In short, we like liquid and efficient markets for all…those that want to buy, and those that want to sell. It really is the foundation of timely price discovery. I remember when I was a young adult looking to sell my used car, and thought I should get more than prospective buyers were offering. My dad reminded that my car was worth exactly what someone was willing to pay me…no more. 

The broad equity market had a frosty beginning to the new year, with the S&P 500 off over one percent. Small Cap stocks continued their surge, however, with a healthy 5% return. After a robust 7.5% return last year, Core Fixed Income started off 2021 down -0.72%.

A Look Ahead

We currently sit at all-time highs in the S&P 500, as the index has risen nearly 5% in the first week of February. We continue to believe there is battle of the “terms” worthy of discussion. In the short-term, we believe that the prospect of a $1.9 trillion stimulus package is enough to provide tailwinds to maintain and potentially propel equity markets higher. The recent jobs report was disappointing as only 49,000 jobs were added in January, far below the forecast of 105,000. The unemployment rate did drop from 6.7% to 6.3%. 

In this “bad is good” kind of market, the negative news hasn’t deterred those that are pushing the new administration to get this substantial stimulus through sooner rather than later. Although the recovery in the financial markets has been swift and powerful over the last 10-11 months, the economy is still hurting in specific pockets, and has been uneven and lumpy. We have favored smaller stocks over the larger names, and believe there are some opportunities in international markets that trailed last year. We are still concerned about the longer-term, as valuations remain high. Further, the seemingly unending outflow of government money is worrisome. That bill will have to be repaid at some point, no?