Market Update – January 30, 2021

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Market Update – January 30, 2021

Stocks posted their worst week since last fall, led lower by unease about some of the remarkable trading gyrations that cascaded through the market. The epic journey of GameStop stock this week will no doubt end up as a case-study example for business schools in the years to come. But the potential for a power shift from market professionals towards groups of individual investors is a movement that cannot be disregarded. Economic data was generally positive this week, and several positive developments in fighting the coronavirus portend well for a second-half recovery.

For the week, the S&P 500 Index finished down 3.31%, while the Dow Jones Industrial Average fell 3.27%. Year to date, the S&P is down 1.1%; the Dow has declined 2.0%. First-time unemployment claims declined again this week, to 847,000, while continuing claims fell to 4.8 million. Last year’s fourth quarter U.S. GDP growth rate (annualized) was 4.0%; however, over the entirety of 2020, the economy contracted 3.5% – the largest year-over-year drop since 1946. Durable goods orders rose in December for the eighth straight month, although the pace of that growth slowed due to the pandemic. The Federal Reserve reiterated that they are planning to leave short-term interest rates unchanged for the foreseeable future, and that they will continue to purchase tens of billions of dollars per month of Treasuries and mortgage-backed securities.

The Covid-19 vaccine rollout continued throughout the country. Pfizer and BioNTech reported that studies indicate their vaccines are effective against variant strains of the virus. Johnson & Johnson claimed that the single-shot vaccine they have in development is effective in preventing both symptomatic disease as well as severe illness. Now that the holiday season spike in case numbers seems to be abating, California and New York are looking to loosen some restrictions.

The saga of GameStop trading this week dominated the news. A group of retail investors banded together to counter the large short position held by hedge funds in GameStop and a few other smaller-name stocks. Through extensive use of call options and the follow-on effects of those orders through the market, pressure was applied to the short sellers to buy shares to close out their positions. This added fuel to the stock’s positive momentum and caused significant volatility. Some online trading platforms curbed or outright stopped trading in certain stocks as a result. That led some to question whether retail investors were being treated unfairly. After a meteoric rise in share price of a company with less-than- stellar fundamentals, the obvious concern is for a precipitous drop once this momentum trade turns.

This type of market movement is unlikely to affect larger companies, as well as companies without significant short-selling via institutional investors. At Planning Alternatives, we continue to emphasize diversification and the use of funds rather than individual stocks as a core investment philosophy. As always, please contact us with any questions about the economy and your financial plan.

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