The GameStop Saga: Should Investors Be Concerned?
On the latest edition of Market Week in Review, Senior Investment Strategy Analyst Alex Cousley and Research Analyst Brian Yadao discussed what’s driving the intense price moves in shorted stocks like GameStop and AMC Entertainment. They also chatted about the rollout of COVID-19 vaccines around the world, in addition to key takeaways from the U.S. Federal Reserve (the Fed)’s recent policy meeting.
Is market sentiment turning euphoric amid the GameStop frenzy?
The week of Jan. 25 saw a dramatic surge in the prices of several heavily shorted stocks as retail investors piled into names like GameStop GME and AMC Entertainment AMC, with shares of GameStop rising nearly 400% at one point in the middle of the week before reversing course, Cousley said.
“This phenomenon, driven by high levels of trading through commission-free apps such as Robinhood, triggered a massive short squeeze and, ultimately, some restrictions from brokerages on the ability for individual investors to trade these names,” he explained. The story has dominated market headlines for several days, leading many investors to wonder how much attention they should be paying to the saga.
“At Russell Investments, we believe this is best answered by taking a step back and looking at the broader market through our three pillars of investing: cycle, valuation, and sentiment”, Cousley said. The strategist team’s sentiment measure does show some pockets of euphoria, he noted—especially in the options market, where the ratio between call and put options has risen to fairly extreme levels. However, the team doesn’t see extreme levels of euphoria when looking across a broader suite of market indicators, Cousley noted—although there are some signs of optimism.
“On the whole, while the GameStop saga is no doubt very exciting and interesting to follow, I believe it’s more of a sideshow. It’s more important, in my opinion, to focus on the early cycle recovery phase we’re in, and the dynamics driving it—such as fiscal stimulus and the rollout of COVID-19 vaccines,” Cousley stated.
Why are COVID-19 vaccinations lagging in the Asia-Pacific region?
Honing in on COVID-19 vaccine distribution efforts, Cousley noted that there’s quite a bit of disparity across the globe. Israel, for instance, has administered at least one dose of the vaccine to nearly one-third of its population, while the rollout is struggling in other parts of the globe, particularly in Europe. Meanwhile, in Japan, administration of a COVID-19 vaccine has yet to begin, Cousley said. “Japanese health regulators are in the process of conducting their own localized safety tests before beginning mass distribution efforts,” he explained.
In Australia, vaccinations are expected to begin by late February, following the country’s approval of the Pfizer vaccine on Jan. 25, Cousley said. The nation is also set to approve the AstraZeneca vaccine in February as well, he added.
“It’s important to understand that the Asia-Pacific region, for the most part, has experienced a much-less severe outbreak of COVID-19 than what’s been seen in the U.S. and Europe—which helps to explain why the rollout has lagged behind in this part of the globe,” Cousley stated.
With more contagious variants of the virus spreading worldwide, he noted that both Pfizer and Moderna have stressed that their vaccines still appear to be largely effective against the new strains. The drugmakers have also stated that they’re working on adjusting their current vaccines to target the new mutations—and that such changes could be completed in 30 days, Cousley said.
Key takeaways from Fed policy meeting
Shifting to monetary policy, Cousley noted that the Fed wrapped up its latest policy meeting as expected, with no changes announced. “The Fed reiterated its dovish stance, with Chairman Jerome Powell again stressing that it’s too early to begin consideration of a tapering in the central bank’s asset-purchasing program,” he remarked.
Powell also said that the Fed will view any rise in inflation as the economy reopens as transient, Cousley noted. “The Fed chair acknowledged that there could be a burst of spending as COVID-19 restrictions are loosened in the coming months—and that the central bank will look through this,” he remarked. This aligns with the average inflation targeting approach the Fed adopted last summer, which stipulates that the central bank will let inflation rise above its 2% target for periods of time to make up for past misses.
“In my view, the Fed is likely to remain accommodative for some time, with an increase in interest rates unlikely until 2024,” Cousley said, adding that he doesn’t expect any changes to the central bank’s quantitative easing program until the first half of 2022.
Disclosures: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
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