GameStop wiped out January earnings. February could be worse.

Of course, there was more than just wild trading on the stock exchange. Investors have learned that the US economy has grown by 4%, a decent number in normal times, but not when the economy is trying to recover from the Covid-19 massacre. The long-awaited revelation of

Johnson & Johnson‘s

Vaccine data (ticker: JNJ) – which should have helped rejuvenate trade with reopening – did not exceed high market expectations.

But investors have been worried about rising sharply shortened stocks, such as

GameStop

(GME) and

AMC Entertainment Holdings

(AMC), companies that had been left dead, but whose shares were certainly not, thanks to a lot of Reddit investors.

The good news: the pain is probably short-lived.

Let’s start with the vaccine. J&J was expected to report an efficiency rate of at least 80%, but reached only 66%. Its shares fell 3.6% on Friday after the news was announced, and S&P 500 futures fell sharply amid all the noise from the shares in short. However, experts rushed to defend the vaccine. They mentioned that it prevented severe symptoms in 85% of patients, which means that even those who caught the virus had coughs, sniffles and fever, but avoided the worst results, while reaching the same level in treatment. the most contagious strains in South Africa.

“These prime numbers may not be as impressive, but this vaccine has a role to play,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management.

This should be great news for the US economy. Things – obviously – are not expanding at the moment. Fourth-quarter gross domestic product rose 4%, a slower touch than economists had predicted of 4.2%, but still strong, given Covid-related shutdowns in the last three months of the year. We will also take a look at what January looks like when wages are released on February 5 – the US is expected to add 150,000 jobs in the last month, compared to a loss of 140,000 in December.

Growth is expected to accelerate in the coming months, thanks to vaccines and fiscal incentives, which will almost certainly come one way or another. Bank of America economist Michelle Meyer expects the US economy to grow by 6% in 2021 and 4.5% in 2022. Full employment could also be reached by the end of 2022. , which would raise inflation to the Federal Reserve’s target rate. And if that’s the case, Fed Chairman Jerome Powell could start raising rates by the end of 2023. “That would clearly be an exceptional result,” Meyer writes. “If everything goes as planned, President Powell and [Treasury Secretary Janet] Yellen will be able to bow. ”

Powell did nothing to suggest an increase in the rate or even the beginning of a reduction in bond purchases at last week’s meeting of the Federal Open Market Committee. He continued to insist that the Fed will remain light until it exceeds the target inflation rate and employment growth returns. Subtext: The Fed no longer relies on economic models to assess when it should tighten monetary policy, but will try to use available data to judge the strength of the economy.

This change has contributed to shorter-term market volatility, says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “The Fed gave up the framework they had and Wall Street was following,” he says. “Now he’s a little connected and sensitive to the narrative.”

And what a narrative it was. The short leak GameStop quickly became a moral story of the little boys who take the man. I’d rather see it for what it really is – a bunch of small investors have discovered the joys and profitability potential of day-to-day trading in a way they haven’t seen since the dot-com boom.

One thing traders need to achieve is volatility and this has been missing for many years. But it should come as no surprise that the return of day trading coincides with a market that is not only moving higher, but also doing so abruptly, similar to what investors experienced in 1998 and 1999. One of the things that ended my trading career and sent me into journalism was the lack of volatility since 2003.

What’s happening with GameStop isn’t that new. Wall Street companies like it

Barclays

and

Jefferies

they sent their customers lists of stocks that have the largest retail activity. And the rise of GameStop and other very short names has not been so different from the mania of marijuana stocks in 2018, for bankrupt companies such as

Hertz Global Holdings

(HTZGQ) in June or even the rally of electric vehicle stocks in November. Recent transactions have just attracted the attention of the market in a way that others have not. This is partly due to the fact that investors did not have a “fundamental” argument to buy GameStop for $ 300, in a way that could

Tilray

(TLRY) – just think of all the marijuana he will sell once the pot is legalized! – or the future dominance of electric vehicles.

But the other big difference is that institutional investors – hedge funds – have been very short on GameStop,

Blackberries

(BB), and the rest. They had assumed that the business was dying, so the stocks must be too. “GME is a reminder not to shorten troubled companies at the beginning of an economic cycle,” writes Nicholas Colas, co-founder of DataTrek Research. “The wolf packs for retail investors are new, but if you’ve ever sat on a hedge fund trading office, you know that leaking shorts has been a blood sport on Wall Street for decades.

This is clear from the way the stocks that make up the Wall Street lists of the shortest companies came up one by one. But just the fact that missing sellers are involved doesn’t make these stocks grow the way they did. The missing element is liquidity. In August, options traders managed to promote

Apple

(AAPL) and other larger FAANGs – Apple gained 22% that month before peaking on Sept. 1 – but the huge enormity of companies means it’s harder for a lot of retailers to push stocks.

Not so with GameStop and the like. Jefferies strategist Steven DeSanctis notes that the shortest shares in the small company Russell 2000 outperformed the shortest ones by 28.3 percentage points, the highest recorded. The difference for shares in the Russell 1000 with large capacity is only 5.4 points, only the ninth largest gap since 1996. The difference in performance can be explained by the smaller number of shares in the shares with small capitalization. “The volume increases, but the liquidity decreases,” says DeSanctis.

But the credit should be given where it should be. There may have been a lot that made GameStop grow by more than 1,600% in January, but traditional investors like it. The big shortMichael Burry, head of Scion Asset Management, along with newer ones like “DeepF – ingValue”, support the argument for buying the stock for several years and put their money to work. And these transactions had a profound value, requiring patience for them to bear fruit.

But we didn’t have to hold on to the pain to see that something different had happened to GameStop in the last six months. It rose 24% on August 31, when Ryan Cohen-managed RC Ventures first revealed a 9% stake in the company. It gained 22% on September 16, when it began taking orders for

Sony‘s

PlayStation 5. On October 8, it increased by 44% after announcing a multi-year partnership with

Microsoft

(MSFT). The shares traded sideways for a while, but never came close to pre-October testing. 8 minimum. To a fundamental analyst, the company could have looked dead in the water. For a technician, it was anything but.

As for the market, it needed a break – and will probably get one. One of the side effects of the short cut is that it has forced hedge funds to sell their shares in order to cover their shorts. This includes some like Apple and

Facebook

(FB), which fell 5.1% and 5.9% respectively in the last week, despite strong earnings reports. Increased market volatility is also forcing some funds to reduce their long holdings as a way to reduce risk.

Although the chances are slim, the possibility of contagion is real. And if nothing else, it will force investors to reconsider what they own and what they want to own in the long run. “We fully expect that this type of withdrawal will be a healthy buying opportunity,” says BTIG strategist Julian Emanuel. “The sound of speculation is likely to be positive.”

Withdrawal comes immediately after the program. This February is the second month of the presidential cycle and is usually quite terrible, with the market declining by an average of 1.1%. Each sector recorded an average loss in the second month of the presidential cycle. It’s not that every February is bad – yields have been positive 12 times out of 23 – it just tends to be that way. “You shouldn’t assume that February 2021 is ‘doomed’ to be a bad month for stocks,” writes Jay Kaeppel of Sundial Capital Research. What you have to admit is that when Moon 2 is “good”, it’s OK. And when Moon 2 is bad, it’s often very bad. ”

Stay on the hats.

Write to Ben Levisohn to [email protected]