Two weeks ago, markets witnessed the organised targeting of short sellers by retail traders. To recap: retail traders organised online to push share prices up in stocks that were being shorted by large hedge funds (short sellers). This forced a number of these short sellers to ‘cover’ their short positions (buying the stock back at the new, higher, prices and in doing so, sending prices up even further). This vicious cycle is called a ‘short squeeze’ – and it is potentially disastrous for short sellers, whose investment proposition involves benefiting from the downward momentum of stocks.
Last week calm was restored. Volatility fell back to around 25 (at time of writing) which, although still elevated, signifies a return to more stable markets. The prices of target stocks like GameStop have fallen dramatically, punishing any retail investors remaining ‘long’ and re-establishing more normalised price levels. Although we seem to have passed this episode of market volatility, perhaps more interesting are the possible long-term implications: how often are we likely to see events like this unfold… and is this the start of a new type of market disturbance that we have not seen before?
First, market manipulation is not new. Social media led manipulation is a 21st century version of targeted price manipulation which is as old as stock markets. Nonetheless, the activity of two weeks ago caught the attention of US authorities, with the Biden administration and regulators publicly announcing they will be looking into these actions and potentially changing market rules to prevent similar actions again. But, with stimulus checks soon to be sent to millions of Americans, how many recipients may be lured into similar online trading frenzies in 2021? Time will tell. But our advice to investors remains the same … steer clear!
Biden wins stimulus battle
The US Senate voted narrowly to advance President Biden’s fiscal stimulus package last week. The proposal calls for the safe reopening of schools, the acceleration of COVID-19 testing and vaccine distribution, financially supporting small businesses, extending unemployment benefits through to September, and increasing food aid. There is a huge gap between Biden’s plan and the Republican counter proposal and some form of compromise may still arise. The most important takeaway for investors, however, is that politics is no longer standing in the way of the US fiscal stimulus.
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