Monday Market Note – February 1st, 2021
By TRG Advisors on February 1, 2021
Last week was another wild one, as the “reddit stocks” experienced unprecedented volatility, market action, and garnered a ton of media attention. These highly shorted stocks started rallying on the back of bullish sentiment that drove buying in the stocks and options, which began on social media. The demand drove prices higher and a short squeeze ensued as hedge funds covered their short positions, which further added to the rally. The action, attention, and percentage swings in these stocks have been truly unprecedented. This volatility started affecting the broader markets as investors seemed uneasy as de-grossing occurred across hedge funds, markets fell, and the 10Y yield dropped below 1%. While this volatility has spread beyond the select stocks directly involved, we do not expect a major drawdown to occur. Broader markets have rebounded this morning, a positive sign that the effects of the ‘reddit frenzy’ may be limited to the stocks/sectors directly involved.
In the end, we must continue to focus on fundamentals which should drive performance over the long term. Earnings season has gotten off to a good start, with nearly 25% of the S&P reporting last week. So far, 37% if the index has reported, with an average sales beat of +3.6% and an average earnings beat of +19.3%. Financials have been particularly impressive, leading all sectors with an average earnings beat of +39.7%.1
Here are a few notable items from last week and a few things on our radar for this week:
- Economic data was decent last week: 4Q20 GDP +4.0% (consumer +2.5%), initial jobless claims 847k v. 900k prior, and new home sales 842k. Also, the Fed kept rates unchanged as expected and reiterated their dovishness and commitment to supporting the economy throughout the recovery.
- S&P 500 relative performance versus the GS Most Short Index (most shorted stocks) had one of its worst days earlier this week – illustrating the outperformance of highly shorted stocks compared to the broader market.
- Silver has joined the rally, jumping nearly 10% this morning, in part fueled by the retail trading frenzy that has driven stocks like GME and AMC. 2
- This week another busy week for earnings with ~20% of S&P 500 scheduled to report.
- Economic data for the week includes: nonfarm payrolls, manufacturing PMI, ISM manufacturing, construction spending, and the latest unemployment rate.