Jan. 25-29, 2021

What happened last week

GameStop stock saga overshadowed corporate-earnings and economic updates

It was a wild week that saw North American equity markets absorb a barrage of fourth-quarter corporate-earnings reports, the first U.S. Federal Reserve economic update for 2021, and shares of retail outlet GameStop surge 412%. All three stories played a role in the markets’ dramatic swings, but most eyes were fixed on GameStop and the controversy it generated.

With 65% of S&P 500 companies expected to release fourth-quarter earnings reports between Jan. 25 and Feb. 5, investors were in wait-and-see mode to start the week. On Monday, optimism picked up throughout the day, led by gains in Microsoft, Facebook and Apple stocks (pushing the S&P 500 and Nasdaq to record highs). Trading proved to be choppy over the week’s first two trading sessions, however. Investors looking for clues regarding the direction of the U.S. economy received indicators on Wednesday, in the U.S. Federal Reserve’s (the Fed’s) first policy update of the year, and in earnings reports from corporate heavyweights, like Apple, Tesla and Facebook (all of which beat expectations).

The Fed held its key interest rate steady

As analysts expected, the central bank held its key interest rate near zero and continued its bond-buying program at the current pace of US$120 billion in purchases per month. But markets still saw a significant pull-back on Wednesday, after the Fed released its statement: “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.” In a press conference after the meeting, Chairman Jerome Powell added, “You cannot adapt motels, sports venues, movie theaters, restaurants, bars. That is millions and millions of people. You are just going to have to defeat the pandemic ... We have not done it yet. We need to finish the job. It is within our power to do that as a country this year.” While this wasn’t the only factor negatively affecting markets on Wednesday, all four of the major North American benchmark stock exchanges tumbled more than 2% by the closing bell – their worst collective performance in months.

GameStop drama continued to play out through the week

From the Reddit forum WallStreetBets (where much of the story originates) up to the White House, the GameStop story echoed far beyond financial circles. Likened to David vs. Goliath, or Main Street vs. Wall Street, the story picked up steam on Monday, as investors and analysts – watching GameStop shares suddenly surge – opened the discussion on “froth in the market,” a phrase used to describe the scenario when asset prices are believed to be higher than their true value. On Wednesday, GameStop shares then surged another 135%, ballooning its market capitalization to US$24 billion. Meanwhile, hedge funds that bet on the share price falling (or short selling) are believed to have lost US$5 billion so far this year, according to research firm S3. The resulting controversy has reached the U.S. Securities and Exchange Commission; on Wednesday, the commission said that it was “aware of and actively monitoring” the situation. President Joe Biden’s economic team also said it was monitoring developments.

On Thursday, GameStop's remarkable six-day rally came to a dramatic stop, losing nearly US$11 billion in market value – after Robinhood Markets, Interactive Brokers Group Inc., and other online brokers took action to curb the trading of the stock (and other surging stocks, including AMC Entertainment and Canada's own Blackberry) on their respective trading apps. This sent the GameStop stock down 44%, while triggering multiple volatility-related trading halts on the NYSE. In a swift reversal, many brokerages said that they would ease restrictions on Friday, opening the door for another surge. The ongoing volatility led to another day of steep losses for North American markets.

The stock and bond market*
S&P/TSX Composite 17,337.03 -2.85% -0.55%
Dow Jones Industrial Avg. 29,982.62 -3.27% -2.04%
S&P 500 Index 3,714.24 -3.31% -1.11%
NASDAQ Composite 13,070.69 -3.49% 1.42%
10-yr GoC Yield 0.84% 0.00% 0.17%
10-yr U.S. Treasury Yield 1.11% 0.01% 0.18%
WTI Crude Oil (US$/bbl) 52.14 0.31% 7.46%
Canadian Dollar US$0.7825 -0.50% -0.37%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending Jan. 29, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.

What’s ahead

Canadian and U.S. trade-deficit data for December. In November, Canada’s trade deficit narrowed to $3.34 billion, from a downwardly revised $3.73 billion in October. The U.S. trade deficit expanded to US$68.1 billion from $63.1 billion (the biggest trade gap since August 2006). Both countries are scheduled to release December’s figures this week.

Circle these dates

  • Feb 15: North American markets closed for holidays
  • March 16-17: U.S. Federal Open Market Committee meeting
  • April 2: North American markets closed for Good Friday
  • Apr. 30: 2020 income tax filing deadline

Key take-away

Be informed (not influenced) by the news: Media and news reports can be informative and beneficial, but they shouldn’t be a driving force in your decision-making around investing. Market performance always needs to be put into perspective, with your goals at the centre. Speaking with a financial representative can add far greater value than merely following the headlines.

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