Watch it go.
Photographer: Qilai Shen/Bloomberg
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Stop Making Sense
Just because event A is followed by event B, it doesn’t follow that A caused B. Indeed, the chances are that B had many causes. But Wednesday’s succession of events was odd, to put it mildly, and lend themselves to a narrative.
GameStop Corp. (remember them) stole the headlines by more than doubling toward the end of the day. The saga of the heavily shorted game retailer isn’t over yet — and anyone who participated at the beginning of the short squeeze, more than a month ago, is still sitting on massive profits:
What prompted this? The company is letting its chief financial officer go, in what is seen as a sign that it will make a more wholehearted embrace of an online future. But it’s hard to build this up as a move that justified quite such an emphatic response. Indeed, the acrimonious departure of a senior executive following differences over strategy might easily be taken as a negative.
As for the wider market, the benchmark 10-year Treasury bond yield spiked from 1.36% to 1.43%, a new post-pandemic high, from 7 a.m. to 9:30 a.m. Greeted with a bond tantrum, U.S. stocks started the day by tanking. Then the Federal Reserve’s chairman, Jerome Powell, began his second day of testimony to Congress. Powell said the same thing he had said the day before, and prompted the 10-year yield to drop back to 1.37% while sending the Nasdaq-100 on an intraday rally of 2.6%. Such things aren’t supposed to happen, or at least not in markets that are vaguely rational. After the close, GameStop surged further, while bond yields spiked again, touching 1.415%.
I recount these events not because I can readily explain them, but because I can’t. When things don’t make sense, and trading gets this erratic and capricious, that is reason for concern. There are plenty of other worrying symptoms at present but I will mention for now only the ongoing alarming power of a few “influencers.” Cathie Wood of Ark Investment Management has been a brilliantly successful investor who has spotted plenty of tech trends early enough to make money from them. But whether the news that she bought more shares in Tesla Inc. on the dip could justify the electronic vehicle maker recovering from a three-week slide of more than 30% to put in a two-day rally of 20% is another matter altogether. Her decision to buy on the dip is the only catalyst that anyone seems prepared to offer for the turnaround:
In general, moves like this can be dismissed as noise, rather than signal. But when the noise becomes this deafening, we need to take seriously the fact that it is drowning out the signal.
What is this noise signaling? It is important to admit ignorance, and I don’t know. But I doubt that the juxtaposition of all these events can be dismissed as a coincidence. There is a lot of liquidity in the market at present, and liquidity tends to obscure people’s judgments. Even if the bond market itself seems erratic and unconvinced, the repeated promise from the world’s most powerful central banker that monetary policy is going to stay easy helped embolden the stock market, and energize those at the fringes even more. To some extent, they are still not that bothered about bond yields at their current level, which remains historically low; they just want an assurance that there will be help from the Fed as soon as yields get too high for the equity market to handle. Although the Fed intervenes directly only in bond markets, Powell’s words have a more direct impact on stocks. That is my conjecture. It’s only a conjecture, but it’s the best I have.
Rotation Uninterrupted
Beyond the erratic excitement in equity markets, which shouldn’t be ignored, the trends of the post-vaccine environment remain clearly in force.
First, bond yields are rising. After a series of verbal interventions from central bankers around the world this week, the 10-year yield has still gained half a percentage point for the year, and February isn’t over yet. That’s a lot:
This development hasn’t yet shaken the overall level of the stock market, but a clear rotation continues. The following chart is my best attempt to smoosh them together; value has picked up relative to growth, small-caps are outpacing mega-caps, energy stocks are beating utilities, and banks are beating tech. Wednesday’s exciting rebound for tech stocks didn’t reverse any of these rotations, as last year’s losers continue to claw back ground at the expense of the pandemic’s winners. This is a clear signal, in line with what the bond market is showing, that investors believe we are destined for a significant reflation:
Arguably, the most emphatic signal of all is emanating from commodities. Bloomberg’s index of industrial metals has gone another tear in the last few days, and is now its highest since early 2013, interestingly enough on the eve of that year’s taper tantrum. The rebound of crude oil is of course a sign to behold. It is now right up with its average levels for the last six years:
All of these signs are unambiguously positive for the economy. For securities markets, I would raise three questions:
- Can markets process the amounts of liquidity currently in the system without some massive malinvestments?
- How much further can bond yields rally without defenestrating equities (and effectively forcing the Fed to show its hand and come up with more support for markets)?
- Will the broad returning strength all go into securities markets, or will it go toward buying stuff (by people) and investing in new stuff (by companies)? If the latter, that would be great for the sum of human happiness, and for the long-term future of the economy, but not so great for the short-term future of the stock market.
For the economy and for the markets, the deepest and still unanswerable question remains: Can we reflate as strongly as markets now suggest without sparking a return to inflation as an important fact of life? I don’t know the answer to this either. But the prize for anyone who can work out the correct answer and position their assets accordingly will be very generous.
Survival Tips
As GameStop refuses to go away, I have had to start plumbing new depths in a search for songs that play on the word “stop.” There are a lot of them. Both Don't Stop Til You Get Enough (by Michael Jackson) and Don't Stop Me Now (by Queen) make good anthems for the Redditors. Stop Me If You Think You've Heard This One Before (The Smiths) might be a good motto for some of the people piling into the stock to follow. Then there's the anthem Stop! by Sam Brown, echoed in a much less memorable song of the same name by The Spice Girls.
Redditors themselves might choose Nothing's Going to Stop Us Now by Starship (once, as Jefferson Airplane, darlings of the Boomers), except that it's one of the most hideous songs ever recorded. How they could go from White Rabbit to this in 20 years is beyond understanding. Or if Redditors want to appropriate a really awful Boomer-era song they can always go with Don't Stop Believin' by Journey.
Let's just hope the episode doesn't end with telling the Redditors to Stop Your Sobbing (by both the Kinks and later the Pretenders). Some of those are good songs, and few of them mean much to millennials. Any other suggestions for songs to cheer on buyers of GameStop?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net
"Market" - Google News
February 25, 2021 at 01:35PM
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Cathie Wood's Tesla Noise Drowns Out Market Signal - Bloomberg
"Market" - Google News
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