Taking Stock

Until very recently, GameStop wasn’t a household name. However, last week, the American video game retailer became the centre of a global controversy with billions of dollars at stake.

The story began last year, when an amateur investor shared a theory about GameStop’s share price on an online message forum called r/wallStreetBets. The forum, which has millions of members, is a place where amateur investors share stock tips. Many of them invest through low-cost trading apps on their mobile phones.

The investor’s theory was that GameStop’s stock price was due a comeback. He also made a more technical prediction: if enough of the forum’s investors bought the stock, then certain hedge funds that had bet heavily on the stock price’s decline would be forced to cut their losses by buying shares themselves, driving the price even further upwards.

Millions of r/wallStreetBets members liked the idea. What followed was a rapid rise in GameStop’s share price, from under $20 in early January to over $500 at certain points last week. The price continued to swing wildly as various platforms suspended trading for the stock, citing complications.

A major debate was soon underway. Many of these small investors, plus a few public figures, were angry that trading had been halted temporarily on the stock. They argued that large investors and platforms were colluding against the plucky underdogs.

The affair raises some interesting questions about the future of financial markets. What further impact could millions of small investors have if they keep acting together? Is there anything that regulators could do to prevent them? Should regulators even try? Wall Street’s regulator appeared to be siding with the investors towards the end of the week.

Market Volatility is Opportunity

The longer-term effects of the saga will be interesting to watch. Most immediately, though, it caused ups and downs in markets last week. The commotion around GameStop’s share price appeared to cause a knock-on effect on markets more widely.

The VIX ‘fear index’, which measures how much volatility the market expects in US stocks over the next month, jumped last week. It rose the most in one day since markets dropped back in March last year.

While it can be alarming to read about ups and downs in the market, savvy investors should remember that volatility creates opportunities. These movements allow fund managers to capitalise on opportunities, says Tye Bousada, founding partner, president and co-CEO at EdgePoint, a fund manager for St. James’s Place.

“This isn’t the first time that we’ve been through extreme volatility. The cause of this volatility is obviously different, and six months from now we’re going to have another cause. But when these dislocations happen, if you’re in a position of strength, you can take advantage of them,” he adds.

The fight against COVID-19 continues

The GameStop drama captured the market’s attention last week. However, the background music of the markets is still the same as it’s been since the pandemic took hold last year. The pandemic, and the world’s recovery from it, is the single biggest factor impacting investments.

Last week, a nasty row escalated between the European Commission and UK drug-maker AstraZeneca. The company has cut supplies of its vaccine to Europe due to production delays in some of its European production spots. European officials asked the company to make up the shortfall with doses made in the UK. However, the company says its UK contracts prevent it from doing so. The EU suggested it might prevent vaccines entering Northern Ireland in response, although it later tracked back from the idea. With so much hinging on vaccine rollouts, disputes like this may be a feature of the year to come.

Naturally, many people are turning their attention to the future now that the recovery is in sight. Although last week contained both good and bad news regarding vaccines, most market participants are expecting the world to continue recovering this year.

In countries that have endured lockdowns, people will resume spending money and driving the economic recovery once they are able to, suggested Artemis, manager of the St. James’s Place UK & International Income fund.

“We have yet to meet (remotely of course) anyone who wants to spend more time at home over the coming months. We have yet to meet anyone whose list of what they want to do doesn’t include travel, eating out, visiting a pub and meeting family and friends.

“We have no foresight as to when this pandemic will end, but when it does, we believe consumers will resume their fondness for socialising and travelling. And, of course, given the significant decline in business, the number of players in these industries has reduced; so those remaining will gain more.”

The Last Word

“This is unacceptable. We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.”

Democrat Representative Alexandria Ocasio-Cortez demands an answer on the GameStop issue