by Alex Cousley, Russell Investments
On the latest edition of Market Week in Review, Senior Investment Strategy Analyst Alex Cousley and Research Analyst Brian Yadao discussed whatâs driving the intense price moves in shorted stocks like GameStop and AMC Entertainment. They also chatted about the rollout of COVID-19 vaccines around the world, in addition to key takeaways from the U.S. Federal Reserve (the Fed)âs recent policy meeting.
Is market sentiment turning euphoric amid the GameStop frenzy?
The week of Jan. 25 saw a dramatic surge in the prices of several heavily shorted stocks as retail investors piled into names like GameStop and AMC Entertainment, with shares of GameStop rising nearly 400% at one point in the middle of the week before reversing course, Cousley said.
âThis phenomenon, driven by high levels of trading through commission-free apps such as Robinhood, triggered a massive short squeeze and, ultimately, some restrictions from brokerages on the ability for individual investors to trade these names,â he explained. The story has dominated market headlines for several days, leading many investors to wonder how much attention they should be paying to the saga.
âAt Russell Investments, we believe this is best answered by taking a step back and looking at the broader market through our three pillars of investing: cycle, valuation and sentiment,â Cousley said. The strategist teamâs sentiment measure does show some pockets of euphoria, he notedâespecially in the options market, where the ratio between call and put options has risen to fairly extreme levels. However, the team doesnât see extreme levels of euphoria when looking across a broader suite of market indicators, Cousley notedâalthough there are some signs of optimism.
âOn the whole, while the GameStop saga is no doubt very exciting and interesting to follow, I believe itâs more of a sideshow. Itâs more important, in my opinion, to focus on the early cycle recovery phase weâre in, and the dynamics driving itâsuch as fiscal stimulus and the rollout of COVID-19 vaccines,â Cousley stated.
Why are COVID-19 vaccinations lagging in the Asia-Pacific region?
Honing in on COVID-19 vaccine distribution efforts, Cousley noted that thereâs quite a bit of disparity across the globe. Israel, for instance, has administered at least one dose of the vaccine to nearly one-third of its population, while the rollout is struggling in other parts of the globe, particularly in Europe. Meanwhile, in Japan, administration of a COVID-19 vaccine has yet to begin, Cousley said. âJapanese health regulators are in the process of conducting their own localized safety tests before beginning mass distribution efforts,â he explained.
In Australia, vaccinations are expected to begin by late February, following the countryâs approval of the Pfizer vaccine on Jan. 25, Cousley said. The nation is also set to approve the AstraZeneca vaccine in February as well, he added.
âItâs important to understand that the Asia-Pacific region, for the most part, has experienced a much-less severe outbreak of COVID-19 than whatâs been seen in the U.S. and Europeâwhich helps to explain why the rollout has lagged behind in this part of the globe,â Cousley stated.
With more contagious variants of the virus spreading worldwide, he noted that both Pfizer and Moderna have stressed that their vaccines still appear to be largely effective against the new strains. The drugmakers have also stated that theyâre working on adjusting their current vaccines to target the new mutationsâand that such changes could be completed in 30 days, Cousley said.
Key takeaways from Fed policy meeting
Shifting to monetary policy, Cousley noted that the Fed wrapped up its latest policy meeting as expected, with no changes announced. âThe Fed reiterated its dovish stance, with Chairman Jerome Powell again stressing that itâs too early to begin consideration of a tapering in the central bankâs asset-purchasing program,â he remarked.
Powell also said that the Fed will view any rise in inflation as the economy reopens as transient, Cousley noted. âThe Fed chair acknowledged that there could be a burst of spending as COVID-19 restrictions are loosened in the coming monthsâand that the central bank will look through this,â he remarked. This aligns with the average inflation targeting approach the Fed adopted last summer, which stipulates that the central bank will let inflation rise above its 2% target for periods of time to make up for past misses.
âIn my view, the Fed is likely to remain accommodative for some time, with an increase in interest rates unlikely until 2024,â Cousley said, adding that he doesnât expect any changes to the central bankâs quantitative easing program until the first half of 2022.
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