The GameStop event highlights the difference between trading and investing: Principal Investment Strategist

Craig Fehr, Edward Jones Principal Investment Strategist joins the Yahoo Finance Live panel with the latest market action.

Video Transcript

- IT infrastructure. We're beginning this hour, though, with that hearing from the House Financial Services Committee yesterday on the volatile trading around GameStop, the market still assessing the implications of what lawmakers, Zack, have called this a fact-finding mission. This was a long hearing. Went more than five hours. We saw six people testify in all, but a majority of the questions were directed at Robinhood co-founder Vlad Tenev. And we also learned what really drove Robinhood to restrict users from buying shares of GameStop at the height of the volatility. Take a listen to the exchange he had with Ohio congressman Anthony Gonzalez.

ANTHONY GONZALEZ: Did you have the liquidity to meet the additional $3 billion deposit requirement?

VLAD TENEV: So as we wrote in detail on-- in my written testimony, there were a series of steps that the Robinhood securities team took to--

ANTHONY GONZALEZ: Read the question another time, sir. At that exact moment, did you have the liquidity for 3 billion? 5:11 AM.

VLAD TENEV: At that moment, we would not have been able to post the 3 billion in collateral.

- And Zack, that was the first time we've heard Vlad Tenev, at least explicitly, publicly, say what was really behind the halting in that trade. And it sounds like things could have been much worse at that point.

- Yeah, and it was, I think for a lot of people who are comfortable and watch business news, watch this show, they might have been disappointed by what they saw in the hearing because that highlight was really one of the few times where we got into the heart of what happened on a minute by minute basis. It was a very good question because, you know, this was supposed to be a fact-finding mission, as you laid out. I mean, we wanted to learn more about what happened, what went wrong. There were a lot of accusations.

But I think that, you know, even when you heard congressmen and women going back and forth against each other, highlighting the fact that this kind of turned into political theater in talking about, you know, some larger maybe hedge fund versus Main Street kind of ideas, but not necessarily into what exactly happened. And we heard some of that in the opening testimony, but this was the chance-- you know, you had these people sworn in to get into the details and get answers to questions that we couldn't get on this show because we don't have that kind of power.

But yeah, I think, overall, we didn't learn as much as we wanted. And again, this was kind of-- we heard from Chair Maxine Waters talking about this being the first go at it. But you would have hoped we would have learned more, or would have been able to show more than just one question here in terms of things that jumped out at us. So I think, overall, a little bit maybe of a disappointment in terms of learning more about what went wrong and what we can do to kind of prevent this from happening again.

- Yeah, Zack, you talk about the political theater. These Zoom hearings also are never smooth. People forget to unmute, and there's all the usual sort of things that we have to deal with on a daily basis. But I think in the five hours, there were a few points that potentially could point to what lawmakers are looking at as their next step.

Another issue that was raised in the hearing was the time it takes to settle a trade is T plus 2, is what we call it. Vlad Tenev saying that, look, technically we should be able to move to a T plus 1. In the case of something like that, then a company like Robinhood wouldn't need as much collateral, certainly not the $3 billion, although there's questions about, you know, considering just how volatile things were at the time, whether that would have actually resolved any issues for Robinhood.

- Yeah, and I mean, we heard a little bit about that, too, when they were discussing potential policy changes around all of that. And it was interesting to hear the update from Ken Griffin, of course representing Citadel there, to say that, you know, that wouldn't be in his top 100 list of things to change about the system as it is because it's not all that important. We're talking about a very unlikely situation with what happened around GameStop and the volatility there.

So kind of, you know, throwing cold water on the idea of that being something that needs to happen right now. And again, kind of a smokescreen from what actually did happen in the case of GameStop, because it's a policy solution, perhaps, going to T plus 1 over T plus 2 settlement, but again, kind of not exactly getting into the heart of it. But hopefully we're going to see that happen in the second go around, or perhaps, you know, in follow-up interviews.

- Yeah. Several more hearings to come. But we're certainly going to put the question to some key lawmakers here a little later in the show. We're going to be joined by Congressman Patrick McHenry in the noon hour. We're also going to be joined by Representative French Hill a little later this hour. So you'll certainly want to tune in for that conversation because they were the ones, in fact, putting the question to the executives yesterday in the hearing.

Let's bring in our first guest for the hour, though. Craig Fehr is principal investment strategist at Edward Jones. And Craig, you've been hearing our discussion on what came out of the five hours of hearings yesterday. What stood out to you in terms of the discussion that happened, and what do you think that hinted at in terms of, you know, what could happen when lawmakers look to maybe tweak some of the market mechanics?

CRAIG FEHR: Yeah, Akiko, I thought your and Zack's conversation was spot on. The term you used, political theater, these things often tend to take on that flavor. I think when you sift through some of the theatrics-- and you guys were just pointing on this-- there's a couple of core elements of this, which is, one, lawmakers are trying to better understand what happened here. It's pulling down the drywall and looking at the plumbing of how trading and market settlement works. That is not typically detail that most people spend their days thinking about, but it's important that the lawmakers have an understanding of what the system is and what the system isn't to ensure that maybe the regulatory framework is capable of handling it. I think that's what they're trying to get to.

What I'm struck by, one of the interesting takeaways from this is there's not a clear side to the argument from the lawmakers' perspective. It's there's some elements of this conversation that are should we be ensuring that retail investors or traders are not restricted from investing in the things they want. The other side would be should we be protecting retail traders from some of the elements and the machinations of what's occurring here or what was exposed by the GameStop frenzy. So I don't know that there's a clear one path from the policymakers here, but I suspect the ultimate intention is to ensure that they learn enough to know if there's going to need to be additional regulation around this.

- Yeah, and when it comes to the volatility issue tied back to the retail trade, I mean, that was one thing we did learn, is how popular trading on some of these platforms have become, simply because of interest from normal retail investors. And whether or not you really change the piping or the plumbing around payment for order flow, which we're going to get more into later on in the show, but I guess it raises the question, is that volatility tied to the retail trade expected to stay here in 2021? Because a lot of people who point to the stimulus checks, they clarified-- some congressmen were clarifying that it didn't necessarily-- you can't connect those dots directly that stimulus checks led to some of this gambling in the stock market. But what would you say might be here to stay when it comes to that in 2021?

CRAIG FEHR: I think one of the bigger, broader, if we just-- just as you said, if we ignore the plumbing here for one second and we just think about the broader implications, I think this highlights, importantly, the distinct difference between trading and investing. And I think that's particularly important for what is being called the retail investor, right? Individual investors that are trying to save for something-- a financial goal, education, retirement, whatever that might be. That can be very different from trying to capture the gains that occur, these flashy, exciting gains that occur in the day trading environment.

There's a place for both, Zack. I think you just pointed that out. There's a place for both. My view is there just needs to be a clear understanding of what risks investors or traders are taking. And then individuals, institutions can determine if those risks are appropriate for their particular situation. I think that's what this is ultimately going to highlight. Whether that produces new regulation remains to be seen. But it's critically important that, if you are a day trader, an individual-- and we've obviously seen tons of these stories that have played out over the course of the past two weeks-- there is a very big difference between, as you noted, kind of the casino element of what feels like this GameStop frenzy versus the need to invest for a long-term financial goal, which isn't necessarily going to be captured by chasing after the latest hot stock or speculative investment.

- And Craig, finally, turning to the broader markets, it looks like, at least in the session right now, we're going to close out the week on a positive note. Certainly a lot of factors at play right now. There's the issue of the $1.9 trillion stimulus, also Janet Yellen sort of hinting at additional stimulus that could come, something in the form of infrastructure, potentially. How are you looking at the policy aspect of all of this, and then also looking at what this means down the line potentially for inflation and your portfolio at the end of the day?

CRAIG FEHR: Yeah, Akiko, I think the fundamental backdrop you just described is categorically positive. That's not new to the markets. Markets have gone sharply higher over the past year for good reason. The outlook for the economy in the back half of the year is quite favorable. I do think we're going to see a meaningful jump in output as we see vaccinations become more prevalent, as we see economic activity get opened back up.

There's a huge amount of pent-up demand. You think about all the folks that are buried underneath snow at the moment across the country that are probably dying for a vacation as conditions warm up. I think we will see that demand show up in terms of a meaningful economic rebound in the second half of the year. So markets, in my opinion, are right to do what they're doing, which is move higher.

At the same time, we are not going to move up every single day. We're certainly not going to, in my opinion, post another 70% gain over the next year like we did over the past year. Some of that is just pricing in those future expectations. I would point out, maybe to Zack's point earlier about some of the market implications of this, while the fundamental conditions remain broadly positive-- an economy that's going to rebound later this year, corporate profits that look quite positive in terms of gains, and a monetary policy environment that continues to be quite favorable, add on top of that the fiscal stimulus that you just mentioned, Akiko, all of those chips are stacked in the favorable outlook camp.

It is worth at least noting when markets are broadly tilted positive as to what could be the risks that would pop up and scare the market periodically. A couple weeks ago, we saw that in the form of a very narrow pocket like GameStop. I think interest rates could probably be that thing that at least temporarily takes a little bit of the shine off the market. We've seen 10-year rates rise sharply. 30-year rates have risen to highs we haven't seen in over a year. I think that might be the new area that the market might key in on, because that does speak to the broader implications here. But overall, I'd say the longer-term fundamental outlook for this bull market remains quite favorable.

- All right, Edward Jones principal investment strategist. A lot of pent-up demand out there for trips. Some people getting an early start with trips to Cancun, but appreciate you coming on here. Craig Fehr, thanks again. Have a great weekend, sir, Be well.