Published Friday, January 29, 2021 at: 8:27 PM EST
Like lemmings going over a cliff, small investors bought shares of GameStop and a few other stocks that hedge funds had bet against this past week, causing a short-squeeze that captured financial media attention.
Don’t fall for it.
The financial fight has been portrayed as a battle of small investors against greedy Wall Street hedge funds, and everyone loves an underdog, but it’s not that simple.
Though the underdog stuck some big hedge funds with losses estimated to total $20 billion, they did it by driving share prices on a handful of out of favor companies to absurd valuations.
They also allegedly manipulated the market in a conspiracy and the Securities & Exchange Commission will undoubtedly be investigating. Whoever gets caught holding the bag last could face legal and financial sanctions.
Moreover, once speculators are no longer willing to pay absurdly high prices for shares in these companies and the stocks return to proper valuations, the result is likely to cause a financial calamity for the last one holding the bag.
In the world of facts that matter to investors focused on building wealth sensibly, the 4% fourth-quarter 2020 rate of growth in gross domestic product reported yesterday was lower than the 4.3% expected. That was a disappointment. A revised final GDP figure will be released late this month. It could be higher, but that’s not so important in the big picture shown here.
More important is that the 60 economists surveyed in mid-January by The Wall Street Journal were still forecasting a V-shaped recovery over the seven quarters ahead, shown in the dotted red line. The gray line shows a full recovery to a pre-Covid GDP.
No double dip recession is expected, despite the slower than expected growth in the latest figures.
The dotted line shows the forecast for the next 21 months.
The Standard & Poor’s 500 stock index closed Friday at 3,714.24, losing -1.93% from Thursday, and down -3.36% from last week. The index is up +49.62% from the March 23rd bear market low.
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The good news is that the Federal Reserve’s preferred measure of inflation may be bottoming, but the bad news is the American consumer’s purchasing power declined by -4.8% in the 12 months ended August 31.