February 2021 Newsletter
After such a tumultuous year in 2020, many had hoped to see a calm beginning to 2021. Unfortunately, we were not so fortunate, as in the past 2 weeks significant volatility in several stocks has occurred as individual traders “revolted” against the Wall Street establishment and sent a few heavily shorted stocks skyrocketing in price and put significant pressure on several large hedge funds with large short positions.
Keep in mind, that due to a high level of available funds (liquidity) that can be invested, historically low interest rates, and unprecedented access for individuals to online trading, momentum trading can cause some seemingly illogical short-term volatility in stocks. While it’s normal to be worried about market volatility in this kind of a climate, I believe these stock swings are isolated instances triggered by narrow areas in the market – and are the wrong thing to focus on.
Will all this spill over into the markets as a whole? Probably not, as overall markets were a little shaky last week but seem to be rebounding as I write this during the first week in February. As of February 3rd, the Dow Jones Industrial Average is slightly up at 0.25% year to date, and the S&P 500 is up 2.13% so far in 2021.
Over the long term, stock prices will reflect fundamentals of underlying companies, such as current earnings, expected earnings growth, net cash flow and the overall economic outlook. From this perspective, most investment managers are optimistic about this year and see potential for a strong earnings rebound in 2021 and beyond. We currently do not appear to be in a position where a “bubble” in overall stock prices exists, like the extremely painful “Internet Bubble” in 1999 – 2001. A recent commentary from BlackRock stated, “we do not see overall equity valuations as being stretched today, although easy financial conditions and pockets of excess could spark further bouts of volatility.”
Investors who remain focused on their long-term goals and position their assets accordingly will likely be successful, despite periodic upheavals in the economy and the financial markets. The GameStop episode reminds us of the differences between speculation and real investing. While disciplined long term investing may be boring, it often allows us to achieve our goals with a lot less risk and help us remain calm through periodic frenzied behavior of the masses.
If you’re interested in learning more about what led up and caused the extreme volatility in GameStop and a few other stocks recently, look out for the release of my upcoming podcast, “Don’t Play Games With GameStop”. You will receive an e-mail when this is posted on Viaggio Wealth Partners Podcasts for listening.
As always, thank you for your trust in me to help you throughout your financial journey as we work together to achieve your financial goals!