Monday, February 1, 2021
A version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
The GameStop saga is somewhere between a low and high risk event
The massive surge in GameStop (GME) shares, the role of the r/wallstreetbets community, and everything else connected to the ongoing ordeal has attracted attention from Wall Street to Main Street and everyone in between. Regulators and even celebrities are chiming in.
The story is dominating headlines as it continues to unfold; there have been no shortage of takes and opinions. It’ll likely be weeks and months before we begin to understand the longer-term, big picture implications.
Maybe this most recent price action is the first of many dominos to fall. Maybe we see regulatory changes. Maybe it’s just another case study of markets functioning properly with winners and losers as usual.
But in the absence of this clarity, investors and traders are left wondering: what does this really matter? And moreover, what’s priced in?
On Thursday, Deutsche Bank’s Jim Reid conducted a flash poll asking how big of a risk — on a scale of 0 to 10 — the r/wallstreetbets phenomenon poses to markets and financial stability.
“The results suggest a well spread but ultimately uncertain view,” Reid reported on Friday after reviewing 700 responses. “Few have strong conviction with 9, 10, 1 and then 0 having the lowest scores. Interestingly a fairly neutral 5 was next lowest but with 2-4 (37% total) equal to 6-8 (also 37%).“
As Julie Hyman observed on Yahoo Finance Live, the chart fittingly looks like a shruggy (i.e. ¯\_(ツ)_/¯).
When there are as many market participants calling it high risk as there are calling it low risk, it suggests no scenario is fully priced in. In other words, if the high risk scenario unfolds, markets may fall. And vice versa.
Two things, however, do seem clear. First, retail investors matter as they always have.
“[Last] week’s events are undoubtedly a reminder of the growing importance of retail investors in the marketplace,” JPMorgan’s Nikolaos Panigirtzoglou wrote on Friday. “This growing importance is not something new, however, as it has been brewing within the financial system for some time.
“Perhaps what [last] week demonstrated is how quickly this retail impulse can propagate via social media platforms, which in turn shows the importance of using social media platforms in gauging retail flows.”
Second, there’s nothing to suggest fundamental factors like earnings growth won’t continue to be the long-term driver of prices. Even Keith Gill, the Redditor known as Roaring Kitty, made his bullish case for GameStop based on fundamentals.
"Stay focused on the big picture,” DataTrek’s Nicholas Colas said on Friday. “GameStop and its ilk are attention magnets, but all the really important issues to equity values remain. Vaccine rollouts. Earnings leverage. Inflation and interest rates."
All this sets us up for a week that comes with a ton of earnings announcements and fresh data on the U.S. jobs market. And surely more headlines about GameStop.