Market Overview – 01/02/2021

After a strong start to 2021, global equities posted a small decline for January after experiencing a 3% fall over the last week. Headlines have been dominated by news of retail investors grouping together on social media platform Reddit to take on Wall Street hedge funds. In particular, struggling bricks and mortar video game retailer GameStop, a target of professional short-sellers, saw its share price soar by hundreds of percent as private investors poured into the stock, forcing some hedge funds to close their positions at a heavy loss. Such was the frenzy of activity, that Robinhood, the online brokerage firm facilitating much of the trading, had to restrict dealing. This in itself prompted criticism about potentially disadvantaging investors.

The impact of the heavy trading in GameStop and some other hedge fund “shorts” such as Blackberry and AMC Entertainment (owner of the Odeon cinema chain) spilled over into the broader market. US share prices fell by 2.5% on Wednesday, followed by a recovery on Thursday and a further 2% fall on Friday. Volatility indicators rose, including the VIX, which saw a sharp increase over the week. Much of this was the result of hedge funds de-risking, a process of reducing overall exposure to the markets. Some of the hedge funds closing out their short positions will have had to make sales of other investments, thus impacting on the market as a whole.

The number of retail investors using online trading platforms has increased rapidly and will likely continue to grow. The company shares that have been heavily bought in recent weeks by the Reddit group of small traders are all businesses that are struggling in some shape or form and their share prices have been pushed way beyond their fundamental value. Eventually, reality will reassert itself and sadly, some of these inexperienced investors will lose out. Long term investors with sensibly diversified portfolios should not be disturbed by this phenomenon.