With the first month of 2021 behind us, and only 5 more weeks of winter left, spring will be here soon! Although our family hasn’t been able to ski as it normally does, with the latest news of the province’s gradual reopening we are hopeful that we may still get a chance to hit the slopes. We know that many of you do not share our love of winter and are eagerly looking forward to warmer weather. Hopefully we both get our wishes - some skiing soon for us then an early spring!

Economic and Market

Increasing confidence that the pandemic is under control and that a very robust economic and earnings recovery will soon be underway has been the narrative in the global equity markets over the past few weeks. North America continues to see a meaningful decline in infection trends. In Canada, the 7-day average rate of new daily infections is falling, bringing hope for reopening. Globally the turn to lower infections rates over the past few weeks has been encouraging but a third wave (or fourth in the case of the U.S.) still remains a distinct possibility. The Spanish Flu of 1918-1919, which has often been used as a comparison, followed such a pattern though fortunately its third wave was not as severe. It is hard to predict the path of this virus, but investors will undoubtedly be on guard. Thankfully the pace of global vaccinations is expected to accelerate in the weeks and months ahead.

The Davos Economic Forum occurred at the end of January, but like everything else these days it took place virtually. The forum brings together the foremost political, business, cultural and other leaders of society annually in Davos, Switzerland. RBC's CEO, Dave McKay shares his takeaways from the event in Davos 2021: Seven challenges for COVID-19 and beyond.

Most of us hoped that the uncertainty and downright strangeness of 2020 would end on December 31st. However 2021 continues to be filled with unusual activity.  Positive vaccine news followed by negative vaccine supply issues in Canada; chaos on Capitol Hill in Washington, DC; another U.S. impeachment trial and another provincial shut down to start the year. Earlier this month the GameStop saga made headlines. 

GameStop Explained

GameStop is a company that sells video games in malls.  As you can imagine the pandemic (and surge in online gaming) has had a huge, negative impact and the company appeared to be on the verge of going out of business.  The stock hit a low of $3.50 in March 2020.  Then a new GameStop board member, Ryan Cohen, the founder of online pet store Chewy, hoped to help turn the company around.  The stock price started to rise trading into the high teens by December. However, the analysts were not convinced, turnarounds like this take a long time and many were not confident that the experience of an online pet store can translate to the gaming business.  The average analyst price target (according to Factset) remains at $13.44. 

Enter the hedge funds - shorting brick and mortar stores is a favourite theme with hedge fund managers.  Some of these managers believed that GameStop would not succeed and prices would fall.  This lead to them shorting the stock (selling the stock without owning it, with plans to buy it back when the price is lower). This soon led to a massive short position and saw a short interest of 71 million shares while GameStop only has 69 million shares.

Next the retail investors became interested, principally those belonging to trading chat rooms on Reddit.  On these message boards several members decided to buy the stock and make an 'investment case' about the large short position. The stock started to move up and quickly - surging to $483 at one point, a rise of 2,200% in 2021.  This happened so quickly because the Reddit community both bought the stock and the call options.  This forced the hedge funds to cover their short positions by buying the stocks, amplifying the upward price movement.  This is called a short squeeze.  A sharp increase in price forces the traders betting against a stock to buy it at a higher price to stop their losses, creating a process that pushes the price even higher.  This type of trading happened in several other names earlier this month, as well as some Canadian marijuana names earlier this week.  However Gamestop, along with all the other names, have seen their stock prices come down significantly from inflated highs. GameStop is currently trading in the low $50s.  Fundamental analysis tells us that GameStop is still very much a weak business and is likely to struggle. 

Many retail investors who jumped in late are facing significant losses along with the massive losses incurred by hedge funds. This reminds us that some type of trading is akin to gambling and not investing.  Investing is not a game, when you do it right you should benefit from the gradual process of compounding value, it is not a get-rich-quick scheme.  Some positives have come to light from this - having the ability for more people, regardless of investment size, be able to invest and build long term wealth is good.  Providing financial literacy to everyone is important so all investors understand the risks they are taking and how to successfully grow wealth.  We take this responsibility seriously and attempt to provide information to both our clients and their family.  We keep our blogs public providing information to anyone interested. Having trusted resources helps all of us make sound financial decisions.

Financial Health

Many of us have a considerable portion of our wealth tied up in real estate.  To better understand what is happening in the housing market across Canada read RBC Economics thoughts New Year, Same Tight Housing Market Conditions Across Canada

RBC Wealth Management has partnered with medical experts to discuss the importance that brain health plays both on your mental and financial wellness as you age.  Good brain health helps us make smart financial decisions but without it we are at risk of making costly mistakes or being taken advantage of financially.  Below are some links to resources:

• Your cognitive health: Symptoms, safeguards, and support (video)
• Dementia is not inevitable: Lifestyle tips for your brain health (video)
• Why women need to be more proactive with their brain health (read)

We are here to help you navigate these discussions and help you protect your financial well being as you age.

As we approach mid-February, now is a good time to ensure that you have made your RSP contribution. The deadline to contribute for the 2020 tax year is March 1, 2021.  The 2021 Handy Financial Planning Facts sheet summarizes important dates and contribution amounts/deductions for RSPs, TFSAs, as well as tax deadline dates and other useful facts. Please let us know if you require assistance to make a TFSA or RSP contribution.

Investing 101 is a helpful article for students who are just starting out on their financial journey. It summarizes four key things to know about TFSA’s and RSPs. Please reach out to us if you have a young family member interested in starting to learn more about savings and investing and we can set up a financial literacy meeting with our Associate Advisor Sarah Kilpatrick.

Wishing everyone a happy and safe Family Day weekend and a Happy Lunar New Year.  Try to enjoy the snow - even if it is from inside your house with a warm drink!