THE WEEK ON WALL STREET
Despite strong corporate earnings, stock prices closed lower after a volatile week of trading triggered by unprecedented activity in a handful of companies. The Dow Jones Industrial Average lost 3.27%, while the Standard & Poor’s 500 fell 3.31%. The Nasdaq Composite index dropped 3.49% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 1.83%.
BULL MARKET TAKES A BREATHER
On Monday, the S&P 500 and NASDAQ Composite overcame early losses to post new all-time highs. Stocks rode a roller coaster on Wednesday, falling sharply despite above-consensus earnings results, only to come roaring back the following day. Stocks suffered another broad retreat on Friday, sending the major indices to their worst weekly performance since October.
Earnings continued to surprise to the upside, with 81% of companies in the S&P 500 that reported results by last Thursday morning exceeding analysts’ expectations.
SHORTS COME INTO FOCUS
The ability of social media to stoke passions and provide a catalyst to herd behavior made itself evident on Wall Street last week. A chat forum became the central hub for motivating individual investors to trade certain stocks with large short positions. This unexpected buying activity roiled markets and fueled a sharp rise in their stock prices. The sudden surge higher forced some fund managers to buy stocks in these companies at higher prices, resulting in substantial losses for the firms.
It’s difficult to say whether this social media phenomenon has long-term implications, though it is likely to change how professional investors evaluate trading strategies in the future.
In order to sell short, you are required to open a margin account. Selling short is not suitable for all investors. Margin trading entails greater risk, including the risk of unlimited losses in a position and incurrence of margin interest debt.
THE WEEK AHEAD: KEY ECONOMIC DATA
Monday: Institute for Supply Management (ISM) Manufacturing Index.
Wednesday: Automated Data Processing (ADP) Employment Report. Institute for Supply Management (ISM) Services Index.
Thursday: Jobless Claims. Factory Orders.
Friday: Employment Situation Report.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Monday: Thermo Fisher Scientific, Inc. (TMO).
Tuesday: Amazon.com (AMZN), Alibaba Group (BABA), Alphabet, Inc. (GOOG), ExxonMobil (XOM), Pfizer (PFE), Amgen (AMGN), United Parcel Service, Inc. (UPS), Electronic Arts (EA), Emerson Electric (EMR), Chipotle Mexican Grill (CMG).
Wednesday: Abbvie (ABBV), Qualcomm (QCOM), PayPal Holdings (PYPL), GlaxoSmithKline (GSK).
Thursday: Ford Motor Company (F), Bristol Myers Squibb (BMY), Merck (MRK), Snap, Inc. (SNAP), Prudential Financial (PRU), Air Products and Chemicals, Inc. (APD), Penn National Gaming (PENN).
Friday: Regeneron Pharmaceuticals, Inc. (REGN), Illinois Tool Works, Inc. (ITW).
FINAL THOUGHTS
The elephant in the room is whether or not these short squeezes, partially driven by weaponized options, will continue. If they do, it seems likely it will be to the detriment of large-cap technology, darlings of the hedge fund industry. There’s an old saying: “never let a good crisis go to waste.” Management of these targeted companies have a unique opportunity to greatly improve their company’s financial condition with little impact on debt loads: issue shares to raise funds. Don’t be surprised if you see more than a few of these announcements.
That said, broader market pullbacks are normal and expected -until they happen. However, last week’s stress had little effect on 2021’s fundamental outlook. While the current distribution remains behind schedule, widespread vaccination against COVID-19 should provide a shot-in-the-arm to consumption in the coming quarters. Low interest rates and dovish fiscal policy offer additional support. The market got a little cheaper last week, but is still a bit overbought and expensive in the short term. For those with cash, we are being patient and waiting on just a little cheaper pricing. Otherwise, if one is invested, any volatility here should be somewhat short term in nature as the fundamental backdrop begins to improve.
Have a good week! 
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February 02, 2021
