The Fed, tech earnings and market drama

It appears that financial market hegemony has shifted from hedge funds and their dark trading pools to the retail mob who use Reddit as their primary source for trading tips. While the Fed and record Apple earnings should be stealing the headlines this Wednesday, they are not. Instead small, previously ignored companies such as GameStop, AMC (the cinema chain), and Pearson, the UK publishing group, are stealing the show as their stock prices surged 134%, 300% and 13%, respectively. The retail trader is now the master value investor. Someone, or something, is trawling the market looking for the most shorted stocks in the US and Europe, posting about these companies on Reddit and rallying the troops to buy these stocks and wreck a few short-selling hedge funds while they are at it. Already one US hedge fund, Malvern, with a sizeable short position in GameStop has had to close out of the trade, crystallise a billion-dollar loss and claim a $2.75bn cash injection from larger rivals. But, while retail traders were coming down from their sugar high, something more fundamentally important was happening – the first Federal Reserve meeting of 2021. 

The Fed: steering a steady ship 

Ahead of this meeting the market had expected the Fed to remain neutral, although at the margin there was a small expectation that a hint at the tapering that will come could be on the agenda. It was not. The Fed statement, although not vastly different from December, was adjusted in two important ways. Firstly, the Fed now thinks that the recovery in the US economy is slowing, secondly, the pace of tapering will likely be dependent on the pace of vaccinations and the eradication of the coronavirus across the world. We have been saying that the most important chart for 2021 will be the global pace of vaccination, now it has been vindicated by the Fed. We had mentioned that the Fed would pass the baton to the newly appointed Treasury secretary Yellen, a former Fed chair. Today was not the day to do that. Instead, Powell and co. had to steady a ship that was veering off course. US stocks have had their worst day since October, the Treasury yield fell below 1% at one point on Thursday, although at the time of writing it is back above the psychologically important 1% level and other safe havens were rallying. The market is showing tentative signs of being spooked by negative newsflow:  the slow vaccine roll out in the US and parts of Europe, that lockdowns will go on for longer than anticipated, and that the promised global economic recovery in 2021 won’t take place. 

While GameStop, AMC and co. can have record breaking days based on the whims of the retail market, the large-cap markets are struggling. Even beloved tech stocks saw their share prices fall, with Tesla down 2%, Apple down 0.5% and Facebook down more than 3%. No wonder Fed chair Powell said that it was too early to be talking about tapering dates and that monetary policy is continuing to play a key role in supporting the US recovery. The Fed chief also said that it is very unlikely that we will see “troubling inflation” in the US anytime soon, which also gives the Fed room to wait and see, and remain in a dovish-neutral stance as governments around the world try to vaccinate their populations at a faster pace than Covid is infecting them. 

The Fed to the US government: hurry up and vaccinate 

If Fed chair Powell was not so restricted in what he can say to the media, we believe that he would have said that he wanted Congress to get on board with the heavy lifting of American economic recovery and agree a stimulus package. As we mentioned at the start of the week, the $1.9 trillion package proposed by President Biden has run into difficulties and, so far, those difficulties have not been resolved. It is worth noting that if Congress passes another round of stimulus, either in its current form or an amended form, then American households could receive another $1,400 stimulus check in the post, however, if the stimulus package is not agreed, then it could be months before these checks are mailed out. Thus, economists cannot rely on this money to boost consumer spending in Q1 or Q2 2021. This could also have ramifications for our Reddit friends, since some of that stimulus money may have made its way into the stock market. We also think that Fed chair Powell secretly wants President Biden to be more ambitious in his vaccination target and not simply pledge 100mn vaccine doses in his first 100 days, on a daily basis that was being achieved before President Biden took office. If he wants to impress America, and the Fed, then he should embark on larger targets for vaccinations in his first 100 days in office and beyond. 

Retail trading: who is the next target? 

Touching on the phenomenon of the retail trader that we talked about earlier, in all my years working in retail trading, I have never seen the retail market move in such a unified pack before. Will it last? Traders have never been better connected, and the moves in AMC and GameStop over the last couple of days suggest more retail traders will be attracted to huge winning positions. However, the trades themselves are not based on fundamentals. As one analyst on Twitter said, GameStop’s valuation has rocketed to $25bn in a matter of days, if its share price rise continues at the current pace then it will be more valuable than Apple in a week. That’s the power of the crowd. But if anyone is thinking of jumping on this bandwagon, we would warn you not to at this stage. Instead, think about large cap stocks such as Facebook or the Nasdaq. After their recent declines we believe that they could recover since the Fed has pledged that it is in no rush to taper, which is good news for tech stocks in the long term. 

The market view 

From a market perspective, stocks took the brunt of the sell-off on Wednesday. The dollar was up 0.5% on a broad basis, and gold was also slightly higher, suggesting a broad risk-off tone. However, the Fed news should stabilise markets in the next day or so, and we expect it to limit dollar upside. Tech earnings were generally in line with expectations. Apple posted record quarterly earnings on the back of iPhone sales and a surge in demand for iPads and laptops, Facebook also posted record revenue and profit as online shopping increased ad revenue and the use of the platform. However, we could see Facebook shares remain sluggish this week as the market digests news that the number of daily Facebook users fell in the US and Canada and that new regulations could impact FB advertising revenue this year. Tesla also had a record-breaking day, reporting its first ever full year profit. However, supply chain problems caused profits to miss expectations for Q4 2020, not that profit has ever really featured when it comes to Tesla’s share price and its massive 270+ P/E ratio. Overall, we see the problems at Tesla as less serious for its share price compared to the problems at Facebook, and Tesla could recover faster than FB in the coming days.