After reaching a new record closing high on Monday at 3855, the S&P 500® index turned lower to record its worst week since the end of October. The index subsequently fell 3.7 percent, seemingly unnerved by the spectacle of the extraordinary short squeeze in GameStop stock, and a handful of other names. So far, the selloff is modest, but it does leave the S&P 500 lower for the year, down 1.1 percent. And high absolute valuations did leave stocks somewhat vulnerable. The S&P 500 closed fractionally below its 50-day moving average at week’s end. The degree of support at that level will no doubt be tested this week. While just about every sector was lower, cyclical stocks were the weakest. Small stocks fared even worse than large, as the Russell 2000 index fell 4.4 percent, but is still higher on the year by 5 percent.

The VIX index surged on Wednesday as the GameStop frenzy intensified, to 37 from a level of 23 the previous day. For the week, the VIX averaged 33. In contrast, the average of the first three weeks of January was 23. Even on January 6, the day of the storming of the Capital, the VIX only edged up to 25.

There wasn’t much discernable reaction in other asset categories to the short squeeze. The yield on the ten-year Treasury fell 2 basis points on the week to 1.07 percent, although it was as low as 1.02 percent mid-week. The two-year note yield fell one basis point to 0.11 percent. High yield credit spreads were little changed. The dollar edged higher, and gold edged lower.

An Online Cohort Proves It Can Move Markets; Investors Wait to Learn the Fate of Stimulus

The short squeeze story has been fascinating to watch and raises a number of questions. How will it play out? Will the stalemate persist as the buyers of GameStop hold their positions, willing to live with a stranded asset? Or, will the profit motive prove too tempting to ignore when the price inevitably begins to drop? But perhaps the real importance of the story lies in the somewhat sudden realization that there is market moving power at the intersection of social media and commission free investing. What is the buying power of the social media cohort, and how big might it become? The current episode has certainly proven that short sellers are vulnerable to this phenomenon. But where else might this new buying power be directed, and how motivated will it be around other causes?

The other issue currently weighing on markets is the fate of President Biden’s $1.9 trillion stimulus package. The two sides apparently remain far apart. The White House says it is open to negotiation, but would also like the package passed as a whole. And the Democratic leadership has not ruled out using the reconciliation process. A group of ten moderate Republican senators has proposed a compromise package totaling approximately $600 billion, suggesting that a lot more negotiating is needed to narrow the gap between the two sides.

Covid-19 Infection Trending in the Right Direction for Now; Q4 Earnings Exceed Expectations

Despite the frustrations associated with the Covid-19 vaccine rollout, the recent news on new infections has been encouraging. The seven-day moving average of daily new infections in the U.S. has declined by 40 percent in the past three weeks, as the peak associated with the holidays has subsided. Hospitalizations have also fallen. Both numbers are still high, but for now are trending in the right direction. Some communities are responding by loosening restrictions.
Somewhat under the radar screen, fourth quarter earnings season continues to exceed expectations, for both the top and bottom lines. With a little more than one-third of S&P 500 companies having reported, earnings are now expected to decline year-over-year by 2.3 percent, according to Factset. At the end of the previous week the expected decline was 4.8 percent, and at the start of the quarter was -9.3 percent. Full-year 2021 earnings forecasts have also climbed, now anticipating 23.6 percent growth.

This week’s economic calendar is headlined by the January jobs report. The Bloomberg consensus anticipates 50,000 new non-farm jobs, as the labor market is expected to rebound from the December decline. The ISM PMI indices are also scheduled and expected to show continued strength, especially in manufacturing. Last week we learned that fourth quarter GDP fell slightly short of expectations at +4.0 percent. The shortfall was primarily due to softness in consumer spending. However, we also learned that December personal income growth far exceeded expectations, while spending fell, not surprising with so few opportunities. As a result, the savings rate rose to 13.7 percent as consumers build their potential spending power. To be sure, a meaningful percentage of the labor force remains out of work due to the pandemic. On Friday, the unemployment rate is expected to remain at 6.7 percent. In comparison, last February it was at 3.5 percent.

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Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
A 2-year Treasury note is a debt obligation issued by the United States government that matures in 2 years.
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