Market Update – 4th February 2021.

4th February 2021

Global equity markets have renewed their upward momentum this week after last week’s (please see here) social media frenzy-induced volatility dissipated and allowed markets to focus again on Joe Biden’s fiscal stimulus plans and the global economic recovery.

In fact, last week’s indiscriminate buying of heavily shorted companies such as GameStop spurred on by the chatroom, WallStreetBets on Reddit, while fascinating to watch, at the end of the day appears to us to be nothing more than a modern day ‘pump-and-dump’ boiler room style scam.  As we said in our last Weekly Market Summary, these companies’ share prices had become completely disconnected from their underlying fundamentals and would not be able to defy gravity for very long – and sure enough the party quickly fizzled.  For example, shares in GameStop, which touched $483 last Thursday (28 January 2021),  has fallen over 80% as it closed last night well below $100.

While an old-style boiler room scam (which is illegal) involved unscrupulous people buying shares, then cold-calling people with exaggerated claims about the company and then selling their shares for a big profit, the internet has created chatrooms which allow these exaggerated claims to be made anonymously.  Unfortunately, this is not illegal – but as many novice retail investors have discovered, it is financially very painful.

The only positive is that given the significant losses most retail investors would have incurred, this may mean these chatrooms will find it very hard to pull-off another GameStop style buying frenzy.  Nevertheless, if you are ever tempted by a chatroom stock recommendation, please always speak with your Adviser first.

However, here at my wealth, we don’t believe in speculative trading, nor do we like highly concentrated portfolios (i.e. just a handful of stocks).  Instead we believe that risk management is just as important as investment performance and returns.  This means that while we will never shoot the lights out with our investment performance, our portfolios should hopefully allow you to have a good night’s sleep!

Economic data so far this week has been consistent with our view that the global economy continues to recover.  For example, the US ISM manufacturing reading of 58.7, while below last month’s reading of 60.5, remains well above 50, which is the line separating expansion and contraction, so the underlying message is clear:  the US economy’s solid growth is continuing.  Additionally, the US ISM employment reading encouragingly rose to 52.6, its best reading in the current coronavirus era, while the ISM services reading improved to 58.7.  This all suggests to us that tomorrow’s (Friday 5 February 2021) non-farm payroll data may show a much better improvement than the 100,000 gain being forecast by the major economists.

Likewise, the 0.7% contraction in the Eurozone’s Q4 GDP was much less than the major economists expected, suggesting to us that economies have adapted well to the latest impact from coronavirus lockdowns.

Later today (Thursday 4 February 2021), the BoE’s monetary policy meeting concludes.  We firmly believe the next move in UK interest rates will be down given the weak employment market and recent retail sales data – both of which will get much worse before it gets better.  Unfortunately, we aren’t expecting the BoE to make any changes today due to the BoE’s wait-and-see mentality, given the recent Brexit trade agreement and the current rapid rollout of the coronavirus vaccine coupled with the fact that policymakers currently appear to favour increasing QE (given the pace of government issuance).  Consequently, we will be closely analysing how the nine policymakers vote.

Investment Management Team