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Earnings are Good. What Happened?

It was an interesting week for equity markets as concerns over Covid-19 vaccine supply and the bizarre trading in the stocks of GameStop, AMC Entertainment Holdings and others took center stage. This resulted in major stock indexes suffering their sharpest one-day losses since October.
New variants of the Covid-19 virus are showing up around the world challenging governments to get their citizens vaccinated as quickly as possible. Demand for vaccinations has been high with several states running out of supplies as soon as they are delivered. Government officials have said it could be late summer or early fall before anyone who wants a vaccine can get one.
For the stocks mentioned above, it seems young investors have been utilizing Reddit’s social news platform to share ideas about which company’s stock to buy. These investors focused on companies that have a large short position against them (unlike buying a stock hoping the price increases, you short a stock hoping the price declines). Shorting shares of GameStop has been popular with a few large hedge funds. If the company declares bankruptcy, the hedge funds would reap a huge profit. However, subscribers of Reddit believe that video game retailer would survive the economic downturn and stay profitable. The buying was so massive by Reddit’s subscribers it resulted in shares of GameStop surging 400% last week. This squeezed the hedge funds because when shorting a stock, the shares have to be borrowed and the short-seller must deposit cash first. If the price drops the short-seller makes money. If the shares rise (against the short-seller) more cash must be deposited. That’s what happened last week. Hedge funds who shorted the stock lost their shirts and millennials who piled into buying shares of GameStop are paying off their student loans and mortgages. Technology advancements and low or zero-cost trading on many brokerage platforms has made online trading cheap and easy; especially to tech-savvy individuals. Concerns are mounting over the similarities between today’s frenzied trading and the pump-and-dump schemes that proliferated during the 1920’s. We all know how that turned out.
If you would like a more in-depth conversation about last week’s events, please give me a call.
For some very good news, 37% of S&P 500 companies have reported 4th quarter 2020 earnings so far. Of those reporting, 82% have beaten analysts estimates according to FactSet. Would someone let the stock market know.
The Markets and Economy
  • A quicker-than-expected recovery in manufacturing in the U.S. has led to supply chain disruptions and higher costs for many materials used in the manufacturing process. Consumers unable to spend on vacations or dining out, have opened their wallets for all kinds of family items from washing machines to kitchen cabinets and even automobiles.
  • The Conference Board reported consumer confidence continued to increase in January. Many U.S. consumers have banked some of the $1.4 trillion in stimulus money and could further stimulate the economy as more are vaccinated and a sense of normalcy returns.
  • China overtook the U.S. as the world’s top destination for new foreign direct investment in 2020. The Covid-19 pandemic amplified the eastward shift in the global economy’s focus which has been accelerating over the last few years.
  • General Motors Co. announced plans last week to go all electric by 2035. The nation’s largest auto maker by sales said it will continue to phase out all gas and diesel vehicles within 15 years.
  • U.S. household income rose for the first time in three months in December. Consumer spending fell 0.2% for the same month showing that Americans have limited ways to spend the increase in household income.
  • A recent Wall Street Journal survey shows economists have increased their growth targets for the U.S. in 2021. The December survey shows estimates for growth this year at 4.3%. For 2020 the U.S. economy contracted 3.5%, worse than analysts had hoped for and the worst since the 1940’s. It seems the economic rebound that began last summer started slowing towards the end of 2020.
  • Just when it appeared that borrowers were catching up with being behind in their mortgage payments, the trend is now leveling off. After hitting a peak of 8.5% of homeowners who have stopped making payments in June of last year, the figure improved dropping to 5.5% in October. However, for the last two months that figure has not budged.
  • Janet Yellen was confirmed by the Senate last week as the first woman to lead the Treasury Department. The former Federal Reserve chairwoman has a close relationship with current Fed chairman, Jerome Powell. The two share common views and should work well together coordinating their efforts for U.S. economic policy.
  • 82% of college graduates did not have a full-time job in place on the day they graduated last year.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
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Securities offered through Triad Advisors, member FINRA/SIPC. Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment adviser. Resources Investment Advisors. LLC and Vertical Financial Group are not affiliated with Triad Advisors.

David M. Kover, Thomas H. Parker, Bradford E. Harris, Laura T. Scobee, Joseph B. Thaman & Brett M. Dankowski are registered to recommend securities offered through Triad Advisors, member FINRA/ SIPC. Investment advice offered through Resources Investment Advisors, Inc., an SEC-registered investment adviser. Resources Investment Advisors, Inc. and Vertical Financial Group are not affiliated with Triad Advisors.