The last couple of weeks have been crazy in the stock market. With Reddit putting a short squeeze on Wall Street, crypto assets going gangbusters, and speculation about what inflation will do in the near future, there’s a lot to talk about.
Reddit vs Wall Street
Gamestop and AMC Entertainment are the two biggest names when we talk about Reddit investors.
A large number of shorts were put in by hedge funds and other big players on Wall Street. A specific Reddit account “recruited” its following to pile into the two companies named above. This group of “retail” investors drove the stock price up (as well as other investors that caught wind of their efforts).
Those hedge funds were forced to cover their shorts so they didn’t lose more money. The stock price for those two companies plummeted in the following days, but that doesn’t negate what Reddit did – they beat the big guys.
What’s a short?
A short is a type of trade. What you do is you borrow shares of a stock at a specific price in hopes that the stock price will drop. If it does, you buy back those shares at a lower price and collect the difference.
For example, if you bought shares of XYZ company at $20 and the share price of XYZ drops to $10, you would cover your short and earn $10 per share as a return.
It’s not for the faint of heart because stock prices effectively have no ceiling, so you could lose A LOT of money.
Cryptocurrencies gained traction over the last few years as investors saw potential. After Bitcoin rose to $20,000 per BTC and crashed, it lost its allure.
Social media brought it back, thanks to Elon Musk. Slight changes in his Twitter bio moved the needle very effectively. Bitcoin is now hovering at $50,000 per BTC. Tesla invested a healthy sum in Bitcoin and will now accept payments in Bitcoin.
I believe other companies will adopt this policy and we will see Bitcoin used for purchases more regularly. There is a place for cryptocurrencies in this world, but it’s uncertain what kind of role it will play.
I go through quite a bit of research each week to get an idea of what the market environment looks like, what the economy is doing, and where there are risks and opportunities in the market.
With that said, the amount of times I’ve read the word “bubble” is alarming. The comparisons to the Dot Com Bubble and the Great Financial Crisis (GFC) are also a cause for concern.
Pundits are using the word “euphoria” more often.
There are a few things to pay attention to:
- The divergence between the stock market and the economy. Typically, near the end of the business cycle, a difference between how the market is doing and how the economy is doing grows. Eventually, things will revert to the mean. That’s to say, the difference between the two will shrink.
- Inflation. The Biden Administration is taking a different stance from past presidents. Inflation and overstimulation of the economy were areas of concern. President Biden is taking the other side of this argument, saying that he’d rather do too much, than not enough. Look for increased stimulus and less regard for inflation. If inflation starts to run hot, expect the FED to cool it down somehow.
Short-term policy changes and speculative movements in the stock market have little to no impact on the long-term performance of your portfolio. The one thing that really moves the needle is your behavior and how you respond to the news.
If you keep your long-term perspective in mind and keep your emotions in check, you should fare better than those that don’t.
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