An online-driven short squeeze

Jan 29, 2021 | Elinesky Schuett Private Wealth Management


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This week, our featured economic commentary provides insight into the recent market volatility that captured the attention of the media recently. We’ve also included the most recent video from Eric Lascelles, Chief Economist with RBC Global Asset Management, where he provides his thoughts on the opening of the Canadian economy.

This week’s blog post also includes a few other interesting articles and resources:

  • Brain Boost Guide: 20 simple things to add to your routine to boost your brain

  • Getting Your U.S. Home Renter-Ready

  • Six Ways to Protect Yourself from COVID-19 Scams

Giving back to our community is important to the Elinesky Schuett team. This week we are excited to share information about a local campaign that was featured in the news recently. The “How are you, really?” campaign, spearheaded by the Mask Off Guelph Masquerade Committee, is aimed at starting open conversations about mental health while raising funds for the Integrated Youth Services Network.

We are continuing the mental health conversation at our upcoming event on February 17 at 1 p.m., Mental health and resiliency in a time of change, featuring RBC Olympian Tyler McGregor. Event details are below.

As always, we end our weekly post with a few good news stories from in and around our community.


Your economic update

It was an interesting week to say the least. Volatility surged for a brief period and then meaningfully retreated. Instead of the usual fundamental developments – the economic trajectory, path of the virus, interest rates, government policy, and earnings – it was a series of extreme swings in the prices of a handful of smaller and heavily “shorted” stocks that caught the markets by surprise. It’s an evolving story that makes for good headlines but has little to do with the broad outlook for the economy and markets going forward. We explain below. We also provide an update on the COVID-19 front, and discuss the inflation conundrum that is likely to surface at some point in the year ahead.

An online-driven short squeeze

A number of obscure and smaller stocks around the world witnessed extreme price moves over the past few weeks. One common characteristic has been that each of these stocks had been heavily “shorted” prior to the recent action. A “short” is a position some investors – typically institutional in nature – take when they believe that the price of a stock will fall.

Over the past week, it was revealed that a large online community of retail investors have been responsible for the surge higher in these stocks. Acting together, they were able to buy vast amounts of shares and options in these stocks, bidding up the prices and forcing some of the institutions to unwind their “short” positions, which then exacerbated the upside pressure creating a sort of feedback loop.

This development caught many by surprise given the extent of some of the moves. The fact it was fueled by some degree of coordination among retail investors socializing online was also noteworthy. While it has limited implications for the outlook for the economy and markets, it highlights the growing force of a retail investor base that is willing to increasingly collaborate. However, we can’t help but wonder how many of these investors are motivated by the potential for gains they perceive to be quick, extreme, and easy. Some have likely undertaken the proper due diligence, but many may be paying little attention to the business value underlying some of these equities. Ultimately, we expect fundamentals will return at some point, as they always do, to be the biggest driver of these share prices.

Coronavirus Update

On the COVID-19 front, the peak of the second wave of the virus in Canada – and third in the U.S. – appears to be behind us. Canada’s seven-day average rate of new daily infections fell again this past week, at just over 5,000 versus the 6,000 from the week prior. Once again, all provinces saw declines, with Ontario, Quebec, and Alberta leading the way. New Brunswick, which had seen a spike in recent weeks, saw a fall in its average. Meanwhile, the northern territory of Nunavut has seen no new cases in recent days, which is reassuring given a significant one day jump in new infections nearly a week ago. The U.S. also saw another week of notable progress. Its seven-day average rate of new daily infections fell below 150,000, versus the nearly 180,000 from a week ago.

A number of regions around the world – Malaysia, Peru, Brazil for example - haven’t seen the same kind of progress witnessed in North America of late. There may be more help on the way as U.S. biotechnology company Novavax released data from two clinical trials in recent days. Its vaccine candidate demonstrated an efficacy rate of 89 percent in the U.K., and showed it protected against the U.K. variant of the virus. Meanwhile, in South Africa, where another variant is prevalent, Phase 2 trial results demonstrated an efficacy rate of 60 percent in people without HIV. Moreover, Johnson & Johnson is expected to reveal results of its trials in the coming weeks. We see high odds of more vaccines being approved in the months to come.

The inflation conundrum to come

One issue that bears monitoring as we transition through the year is the likelihood of upward pressure on the prices of goods and services.

Inflation is most commonly measured by the year-over-year change in prices for goods and services. In 2020, the rate of inflation, particularly for services, fell precipitously at the onset of the pandemic. In the year ahead, we see potential for the economy to move from partially open to nearly fully open. That transition should translate into a meaningful acceleration in growth and consumption. Moreover, despite unemployment that remains elevated, there is a substantial amount of savings that consumers have accumulated following the actions taken by governments. All of this could stimulate an environment characterized by higher prices for goods and services this year.

A jump in inflation is normally a cause for concern. First, it leads to higher input costs for companies, presenting an overhang to margins and earnings growth. In addition, central banks typically raise interest rates in an effort to curb price pressures. This has a tendency of acting as a headwind to growth. Moreover, the valuations of most assets – stocks and bonds – are heavily dependent on interest rates. Generally speaking, higher rates can lead to lower valuations.

However, circumstances currently remain far from normal and the increase in inflation this year may prove to be temporary. That was the view expressed by the U.S. Federal Reserve this past week. They believe the output gap, high unemployment, and longer-term pressures such as technological advancements among other things will impede inflation from permanently rising. They also reminded investors that they are prepared to have inflation run higher than their long-term target for some time before considering any change in its interest rate policy. This shift in their approach was announced last year as they admitted that inflation has more often than not fallen short of their long-term target.

We tend to agree with the approach and comments from the U.S. central bank. The global economy remains relatively fragile, and it is sensible to ensure the economy is on a sustainable path higher before becoming too preoccupied with rising inflation. Nevertheless, we wouldn’t be surprised to see the bond and equity markets wobble at some point this year as they adjust to a more inflationary environment where investors are likely to debate whether the pressures are transitory or more durable in nature.


Variants, vaccines and downgraded forecasts

The latest COVID-19 variant poses challenges as governments continue to distribute the vaccine. In this video, Chief Economist Eric Lascelles shares his thoughts on when Canada's economy can be expected to reopen amidst these difficulties. He also reviews positive economic progress in China, and political and fiscal updates in the U.S.

 

Laptop on a desk. On the screen is a picture of a bald man with a beard. Text reads: Variants, vaccines and downgraded forecasts. #MacroMemo with Eric Lascelles.

Watch the video online: Variants, vaccines and downgraded forecasts


Elinesky Schuett Speaker Series: Mental health and resiliency in a time of change
Featuring RBC Olympian Tyler McGregor

Please join us on Wednesday, February 17 for a discussion about mental health and resiliency. We are excited to be joined by Charmaine Collins from the "How are you, really?" campaign, Cyndy Moffat Forsyth, Director, Integrated Youth Services Network, and RBC Olympian, Tyler McGregor.

Visit our event page for details and your RSVP link: Mental health and resiliency in a time of change

 

Brain Boost Guide: 20 simple things to add to your routine to boost your brain

We all want our cognitive health span to match our lifespan. Fortunately, there is increasing evidence that dementia is not inevitable and exceptional health into old age is possible. The following are some of the best ways to help boost your brain health, provide a buffer against cognitive decline, and keep your brain functioning the way that you want.

You can download your guide online: Brain Boost Guide

 

Getting Your U.S. Home Renter-Ready

Four colourful raised beach houses facing a sandy beach

If you're spending your winter in Canada this year, there may be a great opportunity to earn some extra money — in U.S. funds — by renting it out. To prepare your home, and yourself, for a positive rental experience, read this online article that lists the important steps to take: 8 Steps to Getting Your U.S. Home Renter-Ready

 

Six Ways to Protect Yourself from COVID-19 Scams

Man sitting at a desk holding mobile device in his hand. During unusual times, it's important to protect not only your family's health, but also your finances. Situations like the current pandemic can make people more vulnerable to scams — and therefore, more attractive to scammers.

From texts to door-to-door scams, and everything in between, we’ve listed the most common scams and the ways that you can protect yourself in this article: 6 Ways to Protect Yourself from COVID-19 Scams

 

How are you, really?

Grid layout of four individuals smiling at the camera and wearing the same sweatshirt that reads As we all know, COVID-19 has changed the way many businesses and non-profit organizations are operating in our community. For the non-profit sector, it has also had a drastic impact on how they fundraise. For the past two years we have been the proud sponsor of the Mask Off Masquerade, raising funds and awareness for mental health resources in our community. This year, the Mask Off Guelph Masquerade Committee recognized that the mental health conversation was too important to be cancelled due to COVID-19 and that the various mental health agencies in our community have continued to provide their services, maybe more so now than ever. This year they have taken their campaign online, asking the question “How are you, really?

Funds raised through community sponsorship and the sale of the “How are you, really?” clothing will support the Integrated Youth Services Network. The campaign has raised over $17,500 as of Wednesday, January 27!

We are thrilled to be the presenting sponsor for this campaign, and are looking forward to continuing the mental health conversation at our upcoming mental health and resiliency event on February 17: Mental health and resiliency in a time of change - Featuring guest speaker Tyler McGregor, RBC Olympian

For more information about the “How are you, really?” campaign, please visit the Mask Off Guelph Masquerade social media pages: Facebook/maskoffguelph and Instagram @Mask Off Guelph

Please visit transformingyouth.ca/ for more information about the IYSN – Integrated Youth Services Network.


Community Corner

Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!