It seems like investors have plenty to mull over this morning, given the crazy action around apparent short squeezes, sobering comments about the economic recovery from the Federal Reserve, lofty stock valuations, and mixed economic news.
The government’s first estimate of fourth-quarter gross domestic product came in under expectations, showing a 4% annualized gain when a Briefing.com consensus had forecast a rise of 4.4%. But weekly jobless claims data, a more up-to-date measure of economic health than the backwards-looking GDP print, came in better than expected, with initial claims coming in at 847,000 compared to 875,000 forecast in a Briefing.com consensus.
Although the jobless data was better than expected, it still shows a very high number of people out of work. Investors have been getting increasingly jumpy about the economy amid an uneven vaccine rollout, and the overall state of worry seems to have worsened in recent days as concerns have grown about speculative trading, spilling over into losses overseas.
With the disruption going on in the market right now related to apparent short squeezes, some investors may be taking profits on long positions to pay for losses in short positions, essentially selling winners to pay for losers and helping cause a readjustment of capital. At times like these, if you’re reassessing your own portfolio, it may be a good time to keep trades on the smaller side.
Turning to earnings, Apple Inc AAPL opened its books on a blowout quarter yesterday after the closing bell. The tech giant’s quarterly revenue moved above $100 billion for the first time on double-digit sales increases in all of its business categories, and earnings came in handily above analyst expectations. Notably, iPhone sales rebounded on the back of interest in the new iPhone 12 models. They had slumped the previous quarter as people waited for the new smartphones to come out.
Despite the amazing results, AAPL shares were down more than 2% this morning. It seems likely that this is a buy-the-rumor-sell-the-news sort of situation, and investors may be taking some profits from AAPL’s run up in days prior to the earnings release.
Turning to another tech-related company, Facebook, Inc. FB shares were faring a bit better—near the flat line in the early going—after the social media company reported better-than-expected sales and profit. At the same time, the company said that a moderation or reversal in the pandemic-accelerated shift toward online shopping and goods could negatively impact advertising revenue, as could privacy changes in AAPL’s mobile operating system. It seems this outlook is playing tug of war with the better-than-expected quarterly results to keep FB shares relatively flat this morning.
Tesla Inc TSLA is another big tech-related company that reported quarterly results after the bell. Its shares were down more than 5% this morning despite the electric vehicle maker’s revenue coming in ahead of expectations. Although TSLA had another profitable quarter, it’s earnings came in well under analyst expectations. Plus, when you consider the incredible run recently in TSLA shares, it might not be unexpected to see a little froth come off the top.
Wall Street Worry Ratchets Up
Risk sentiment took a hit on Wednesday amid cautious words from the Fed and apparent institutional selling associated with retail investor-sparked short squeezes.
Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) shot more than 60% higher to close at 37.21, its loftiest point since early November. With equities under pressure, investors moved into the relative safety of U.S. government debt, pressuring yields. A prolonged stay above 30 in the VIX could present a possible crossroads for investors, potentially drawing more sellers into stocks.
A nearly 4% loss in Boeing Co BA shares didn’t help market sentiment either. The aircraft manufacturer—facing delays in its 777X program amid engineering setbacks, the coronavirus travel slump, and extra scrutiny after the deadly 737 Max crashes—reported a record yearly loss and took a $6.5 billion charge in the most recent quarter. Although BA’s revenue was slightly better than analysts had expected, its per share loss was much larger than analysts had forecast.
Recovery Seen Taking Time
Fed Chairman Jerome Powell said in his post-meeting press conference that it would be a long road to economic recovery, and that appeared to add to late selling pressure on Wall Street.
There had been this belief that a vaccine would be a magic potion that would sort of pick everything up, but Powell put things in more realistic terms. It takes a while to recover, and that’s why rates remain unchanged and the Fed’s bond-buying program continues.
In Powell’s press conference after the meeting, he said the central bank took the word “medium-term” out of its policy language because the issues the economy faces like vaccinations and new cases are all happening now. The words “medium term,” he said, are more a description of what he called “long-term scarring” to the economy.
The Fed said that the path of the economy will depend significantly on the course of the virus, as it’s said in the past, but added the new phrase “including progress on vaccinations.”
A Fine Line
Fed Chairman Jerome Powell continues to walk a tightrope, balancing monetary accommodation as the pandemic lingers, but also keeping in mind the added debt load. The pandemic goes on, and now reports of a variant virus that may be more contagious are complicating the return to any kind of “normal” we were accustomed to before the outbreak.
This economic cloud of uncertainty continues even as arms get vaccination jabs. There are no guarantees enough people will get injections to bring us to a herd vaccination level. And who’s to say what variant viruses might bring?
And the economic impact? Sure, people are spending money, but consumer confidence is still hazy, rising modestly this month after a December dip. The gain in the Conference Board Consumer Confidence Index to 89.3 from 87.1 in this week’s report was mostly attributed to the government’s pandemic relief checks sent out in late December. That’s a pattern repeating what happened after last year’s first round of stimulus checks.
“The slow rollout of the vaccines and the still-raging pandemic continue to depress consumer confidence despite the prospect of further fiscal aid and a brighter health situation,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York, said of the Conference Board report.
Adding more grist is the weaker outlook for the job market after 900,000-plus jobless claims were made in the first week of January alone.
CHART OF THE DAY: The Cboe Volatility Index (VIX) shot higher Wednesday as worry mounted about certain speculative trading as well as cautious words about the economic recovery from the Fed. Although one day doesn’t make a trend, the extra unease is coming amid questions about high market valuations and perhaps a more sober look at the vaccine rollout. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Vocabulary of the Day: A lot of attention has been paid to GameStop Corp. GME and AMC Entertainment Holdings Inc AMC as apparent “short squeezes” have contributed to massive gains for the stocks in a short time. But what exactly is a classic short squeeze? When an investor wants the ability to make money if a stock falls in value, they can borrow shares and then sell them. If shares fall as expected, the shorter can buy them back at the lower price, return them to the brokerage they borrowed from and count the difference (minus any interest on the borrowed shares) as profit. The problem comes when shares rise on unexpected bullish news, or as the case appears to be with GME and AMC, unexpected speculation.
In that scenario, investors who are short a stock then have to pay back those shares at a higher price than what they borrowed them at. That means in theory that the shorter could face unlimited losses if the stock continues to climb. During a short squeeze when a stock is moving higher, those short the shares will often buy back the borrowed shares at higher prices to exit their position, taking a loss before the damage gets worse. That buying further exacerbates the problem of a rising stock price for other short investors. It’s the classic reminder to all traders—a stock can only fall to zero, but there’s no cap to the upside.
Many More Users: The coronavirus pandemic has accelerated shifts that were already happening, such as the adoption of working, learning, shopping, and being entertained remotely. A positive trend has been more retail investors in the stock market. This trend was already happening, but extra time and perhaps easier access to the markets have continued the trend. However, as with everything, we would hope that people are taking time to be educated on risk. Amid the pandemic, some people who haven’t lost their jobs have had more money to spend because of congressional stimulus even as they haven’t been spending as much money going out to restaurants or movies. And extremely low interest rates in response to the economic fallout from COVID-19 have helped make stocks more attractive. Those factors have helped boost the power of retail investors in the market, so much so that chat room comments online can spark enough buying to cause short squeezes that gives hedge funds headaches.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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