Gill Capital Partners Mid-February 2021 Update

“ Investors should remember that excitement and expenses are their enemies” ~ Warren Buffett

As we approach Valentine’s day, 2021 is proving to be a year of continued surprises. The second impeachment trial of former President Donald Trump began this week and has stolen the spotlight from the Reddit fueled short-interest stock rally of the past few weeks. The election and subsequent capitol riots feel more like a distant memory than the biggest headline one month ago. The continuous stream of shocking headlines makes investors yearn for the boring days from years ago, when any one of these headlines would have been a remote event. But, here we are, and markets are at or near all-time highs as hope for an economic reopening, talks of another round of stimulus, and low interest rates continue to push stock markets higher. More on this below, but first, a bit of humor.

GamesStop, sitting amongst companies like JPMorgan and Amazon after Reddit users make it a Fortune 500 company.

Reddit/Robinhood/Hedge Fund Short-Squeeze

Retail day traders armed with stimulus money, along with commission-free app-based brokerage platforms such as Robinhood, have generated short squeezes in many of the most highly shorted stocks, including GameStop & AMC. A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who have sold it short (in a bet that its price would fall) to buy it back in order to forestall even greater losses.

The scramble to buy to cover short positions only adds to the upward pressure on the stock's price. Short selling hedge funds are estimated to have lost approximately $5 billion in the short squeeze, as the price of these down-trodden businesses skyrocketed by as much as 1600%, only to quickly fall back to earth. The short sellers were led by 34-year-old Keith Gill (pictured below), whose red headband has become famous. Mr. Gill attracted an army of day traders who cheered each other on and piled into the brick-and-mortar video game stock and call options, creating a massive short squeeze.

Our view – While this has made for interesting headlines, the impact of the various Reddit-driven short squeezes has been pretty modest on broad markets. The real story here is the rising impact of the retail investor on the stock market. It is not a coincidence that this happed during the largest period of fiscal and monetary stimulus in U.S. history. The market has historically been driven by large Wall Street firms, but now the “little guy” has a voice. This form of a populist uprising in the financial markets is probably a good thing for markets in the long run. This situation has given the small retail investor a voice that should be respected, and investors will need to be educated as to how this may impact markets and risk management going forward. There is still a lot of information we don’t know, including whether and how market regulators will respond.

To be clear, we do not view this as investing, but rather as high-risk gambling on short term market movements of fundamentally unsound companies. We prefer to buy high-quality, innovative businesses that can generate long term value for shareholders.

Impeachment Round Two – The second impeachment trial of President Donald Trump is now underway and has, for the moment, seized market headlines away from GameStop. The Democratic House impeachment managers have their work cut out for them as they will need to persuade a significant number of Republican Senators to break ranks to convict the former President.  

Our view – From an investment perspective, this is pretty much a non-event. As the impeachment proceeding are focused on a former president who is no longer in power, the outcome will not be impactful to governmental policies as they relate to financial markets. So, while the outcome may be important and historical, it is largely unimportant to investors at this time.

Market Update – Stock markets have continued to move higher and now generally sit at or near all-time highs. Stocks are being supported by a vaccine roll out that brings with it hope for a return to normal in the not-too-distant future. Furthermore, clarity on the political front, and specifically renewed excitement about further stimulus, is driving expectations for higher growth and, in turn, investors continue to pile into equities despite historically high valuations.

Our view – Massive government stimulus, low interest rates, and an economic rebound are a powerful backdrop for stocks. Yes, stocks are expensive, but as we have said previously, they can stay that way for some time, and given historically low interest rates, it would not be out of the question to see valuations move even higher. Remember, we are seeing an unprecedented level of fiscal and monetary stimulus, assuming the next round is approved. This will add more “fuel” to the fire. What are we worried about? Inflation and interest rates. The massive stimulus will logically drive inflation, and inflation has historically led to higher interest rates. Even a small move higher in interest rates could have a meaningfully negative impact on all risk assets. The Federal Reserve has stated clearly that they do not anticipate increasing interest rates for at least two years, but these expectations can change, and likely will if inflation rears its ugly head. For now, however, inflation is under control, and dramatically higher rates are unlikely in the near term but remain on our radar.

As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.