Gross domestic product increased at an annual rate of 4.0% in the fourth quarter of 2020, according to the first estimate released by the Bureau of Economic Analysis. This follows a 33.4% gain in the third quarter, a 31.4% drop in the second, and a 5.0% drop in the first quarter. Netting out the full virus-plagued year, GDP decreased 3.5%, compared with an increase of 2.2% in 2019.

Initial jobless claims for the week ending January 30 came to 779,000, a 33,000 week-over-week drop. The four-week moving average was 848,250, a decrease of 1,250 from the previous week's revised average. These numbers are slightly below those reported in December.

Total nonfarm payroll employment improved by a slim 49,000 in January, the Labor Department reports. The unemployment rate declined 0.4% at 6.3%.

The S&P 500 started 2021 with a minor drop of 0.4% on a total return basis in January. This was enough for a major lift to the CBOE VIX market volatility index, which closed the month at 30.21, 32.7% higher.

Globally, equity returns were more varied and interesting. London’s FTSE 100, Tokyo’s Nikkei 225, and Shanghai’s SSE Composite gained +0.2%, +2.4% and +0.9% respectively in January while Frankfurt’s DAX was down -2.1%. The big winner was Hong Kong’s Hang Seng, up +5.2% after an even stronger December.

According to Chinese state-owned media, the U.S. Federal Reserve, the European Central Bank and the Bank of Japan grew their balance sheets by a combined $8 trillion in 2020, “or 2.5 times China's foreign exchange reserves.” CGTN reports that, while the People’s Bank of China increased its holdings by 12% last year in a move to inject liquidity into the Chinese economy, the Fed made the same move in the States – but by 76%. The report implies that the massive balance sheet expansion by the U.S., the ECB and the BOJ portends a U.S. stock market bubble, and to a lesser extent bubbles in European and Japanese markets as well.

Oil continued to recapture ground in January as West Texas Intermediate crude gained +7.9%. It ended the month at $52.20 per barrel – roughly the breakeven point for the most efficient producers. Meanwhile, gold continued its zigzag pattern, closing down -2.3% at $1,847 per ounce at month-end.

The dollar was little changed against the euro or pound in January, but up +2.2% against the yen.

Cryptocurrency continues its surge with Bitcoin up another +14.2% in January, closing last month at $33,114 after setting records early in the period. If you want further proof that crypto investing has gone mainstream, you need look no further than CNBC’s landing page. Until recently, the dollar-bitcoin pair was listed at the end of the “FX” tab there. Now, the page features a new “Crypto” tab that compares the greenback to five different digital assets.

Be a Tesla, not a GameStop

We were all set to write a column this month about how a stock like Tesla can go to the moon the way it has. TSLA, now trading in the mid-$800s, appears to be taking a pause after having climbed more than 200% in six months. We were going to discuss how a good stock has a good story, and how the company’s fundamental soundness and the brilliance of its management team can propel the value of its equity to majestic levels.

And then GameStop happened.

Short circuit

In case you missed it, GameStop (GME) surged 243% over the course of 2020. This stock, which traded below $3 some of the time, closed last year at around $20. And that would’ve been a nice success story for a downtrodden, well-past-its-prime, brick-and-mortar retailer.

After a rise like that, experienced investors took profits by selling their shares. More bold investors even shorted the stock. But GameStop is a sentimental favorite among the Millennial and Gen Z crowd. It’s a part of their childhood, and some young investors banded around a community in the Reddit social media platform to commiserate. They ended up hatching a scheme known as a short squeeze. If you really want a definition, Investopedia will oblige. Or you can ask your financial advisor, who will preface the explanation with a steely-eyed “Now don’t ever try this, but …”

Basically, these Redditors started buying up the stock, which had the effect of raising the price of GME. Because all these other investors – primarily hedge funds – had bet that the price would go down, their short positions became increasingly unprofitable. As the stock price soared, they had to buy more shares to cover their positions so they didn’t lose even more money. Throw in the fact that most of this was done on margin – that is, the fund managers borrowed money from their brokers to pay for the shares they borrowed from the same brokers.

And it all snowballed from there. GME ended up rising more than 1,700% in two weeks. Once the short positions unwound, though, the stock sank back down into the $50 range. So, even buy-and-hold investors may have made some money on this, as did some of the traders on Reddit. But the vast majority of investors who participated in all this speculation took a bath. Some hedge funds closed up shop.

Interestingly, all this damage was done for no economic reason. This was all about rooting for a sentimental favorite and, not insignificantly, “Sticking It To The Man”.

Tesla keeps rolling

Interestingly, the last stock before GME to get the short-squeeze treatment was none other than TSLA.

In early 2020, Tesla was the most-shorted stock on the U.S. exchanges, with “more than 18% of its outstanding stock in short positions,” according to Investopedia. “In late 2019 through early 2020, Tesla stock soared by 400%. Short sellers got hammered, collectively losing about $8 billion.”

That’s because there really is a strong investment case for Tesla.

“Tesla and its founder Elon Musk are at the forefront of a push towards a greener future, and the company’s position as an early adopter gives it a competitive advantage in the market,” according to CNBC’s Pippa Stevens. “Not only is Tesla a leader in electric vehicles, but its growing battery, solar and autonomous driving divisions will fuel future gains. Essentially, it’s a leader in its field, and the competition is well behind, say those who favor the stock.”

(So, if you’re looking for another reason why ESG investing is an important and timely topic …)

Strong demand for the Model Y and Cybertruck is only part of the story. So is the efficiency that comes with the auto division being 100% dedicated to electric vehicles. Also, its inclusion in the S&P 500 – which came about in December – means that funds not only want to own TSLA, now they have to. And while both production capacity and free cash flow continue to ramp up, there’s still more to come from Tesla, according to its proponents.

It’s a leader in creating new tech for autonomous vehicles. It’s got some of the best battery technology. And its betting on the continued rise of China and other emerging markets. So while TSLA is knocking on the door of $1,000 a share, you’ll hear a lot of chatter – not to be taken too seriously at the moment – of it going up to $6,000 or even $7,000.

Parting thoughts

Individual stock picking is tricky.

The fact that GME remained above its initial starting point is telling. It means that even a beat-down company like GameStop can be undervalued; there can be fundamental strengths or a change in strategy or some other overlooked company news that makes it a buying opportunity.

Similarly, a company with a good story and a lofty share price might just be overhyped. For every Tesla there’s a WeWork.

One trick, then, is to be able to distinguish what a stock’s true value is and what a realistic target price for it can be. Another is to determine whether that stock deserves to be a core, long-term holding in your portfolio, or is it just a flier that you’ve purchased for the value of its momentum.

As we’ve seen, though, it’s impossible to anticipate all externalities that might favor one company over its competitors. The typical investor makes more bad calls than good ones and, when you net those out, it’s hard to beat the overall market for any length of time. Maybe the best course of action is to invest in exchange-traded funds and then, every now and then, get in on a long shot. To guide you in determining your risk profile, it might be best to consult a financial professional.

-David

David Camarillo, CFP®, ChFC, CFS

Director of Advisory Services

David is a proud Trinity University alum, where he earned his Bachelor of Arts in English and History. He started his career in the financial services industry in 2005 at Wells Fargo, and in 2007 he joined H.D. Vest Financial Services where he consulted for the company’s top financial advisors. He held a Series 7 and 66 until 2018, and he still holds life and health insurance agent and variable insurance products agent. He obtained the Certified Financial Planner™ (CFP) designation in 2011, the Chartered Financial Consultant (ChFC) designation in 2014, and holds the Certified Funds Specialist (CFS) designation. David has been a Wealth Advisor with Smith Anglin since 2014, and in 2019 he was promoted to Director of Advisory Services.

Outside the office David stays active with his wife, Mayra, and two kids, David Jr. and Amelia. David is an avid runner, racing everything from the 5k to the marathon. He enjoys hiking nature trails with his family and their dog, Bo, and playing guitar loudly when possible. He also volunteers with Back on My Feet and the North Texas Food Bank.