Populism Comes For The Stock Market

One of the most ridiculous weeks in recent memory ended with a flourish, as US equities careened lower, turning negative for 2021 in the process.

By Friday afternoon, most pundits had exhausted the thesaurus. Synonymous for “absurd” were all used up.

This was the week when populism came for the stock market, aided and abetted, ironically, by billionaires. “You can’t sell houses you don’t own. You can’t sell cars you don’t own. But you can sell stock u don’t own!?,” Elon Musk tweeted, feigning incredulity. “This is bullsh*t – shorting is a scam.”

Power to the people. Courtesy of the richest man on the planet. Who just happens to harbor a legendary grudge against shorts. A farce within a farce.

Equally ironic, the Reddit crowd’s usurpation was briefly short-circuited Thursday by Robinhood and other retail platforms that ostensibly aim to democratize the once exclusive world of finance. Lawsuits were filed. Congressional hearings are planned. Everyone took their turn playing the victim. Personal responsibility was nowhere to be found.

“[The] flashpoint between r/WSB and short-selling hedge funds [is] another escalation in The War on Inequality,” BofA’s Michael Hartnett said.

“Our secular view is inequality can only end via higher wage inflation for [the] poor and wealth taxation for rich,” he added, cautioning that “regulation aimed solely at new investors will simply sustain [the] bull market in anger.”

On Friday, the SEC attempted to strike an impossible balance, pledging to protect retail investors both from themselves and from efforts to curtail access to trading, while simultaneously cautioning the same investors to be conscious of their own behavior.

Ultimately, it was the worst week for stocks since late October. The S&P fell more than 3%, as did the Nasdaq 100. It’s no secret why. The Russell 2000 logged a fifth consecutive daily loss Friday, taking small-caps’ decline for the week to almost 5% (figure below).

Bitcoin (and Dogecoin, because why the hell not?) surged Friday thanks to Musk. Dollar-Libor dropped to a record low while interbank rates in China surged — funding feast versus famine.

The VIX jumped the most on a weekly basis since June (figure below).

Rates ended up being a side show, despite 10-year yields testing 1% (on the downside). It’s ironic (how many ironies is that now?) that rates were relegated to the back burner. After all, this was a Fed week and also GDP week. Additionally, one might have expected headline hockey around Joe Biden’s stimulus package to play prominently.

“The price action in a small subset of single-name stocks have been the show stoppers of late,” SocGen’s Subadra Rajappa said. “As equity indices declined, the uncertainty premium benefitted bonds [while] uncertainties around the timing of additional fiscal stimulus, squabbles over vaccines, and a dovish Fed were additional factors that weighed down the 10-year yield to 1%,” she added. “With the Treasury refunding announcement next week and more long-end supply in the coming weeks, we expect the 10-year to remain in the 1.0-1.20% range in Q1.” Treasurys fell Friday, eliminating the last vestiges of what was a weekly gain (figure below).

“Despite the week just passed containing several top tier fundamental inputs, the macro backdrop and shape of the recovery remain tied to the path of the pandemic and progress on the drive toward herd immunity,” BMO’s Ian Lyngen and Ben Jeffery wrote Friday afternoon. “With 21.7 million people having received at least one dose of the COVID-19 vaccine, we’re reminded that a 6.6% inoculation rate domestically leaves a mask-less reality at least several quarters away,” they added, noting that “the more extended the period that business activity is beholden to virus-mitigating measures, the greater share of temporary job losses will become permanent.”

Johnson & Johnson on Friday said its single-shot vaccine produced robust protection against the virus in a late-stage trial. It prevented two-thirds of moderate to severe cases, 85% of severe infections, and 100% of hospitalizations and deaths. “If you can prevent severe disease in a high percentage of individuals, that will alleviate so much of the stress and human suffering,” Anthony Fauci remarked.

Meanwhile, Andrew Cuomo plans to reopen New York City indoor dining at 25% capacity on Valentine’s Day. The city’s positivity rate fell below 5% by Thursday, a sharp decline from over 7% early this month. Pressed by restaurants who worry that 25% capacity isn’t even close to sufficient when it comes to rescuing their businesses, Cuomo said simply, “Look, 25% is better than zero.”

While fatalities nationwide remain tragically high, cases are falling rapidly (figure below).

Despite having spilled gallons upon gallons of digital ink documenting this week’s dramatics in real-time, it feels like there should be more to say.

Ultimately, though, I’m not sure there is. The financial media wrote the same story over and over again, until, finally, it went national as The New York Times, CNN, and others jumped aboard. The Reddit crowd was heralded as courageous usurpers one minute and derided as gamblers and amateurs the next, sometimes by the very same outlets.

I just have one question for every would-be populist, small government, libertarian commentator who spent much of the last nine months suggesting that the Robinhood / Reddit crowd was squandering everyone else’s tax money by speculating in stocks: Are those traders freeloading degenerates that don’t deserve a stimulus check or are they heroes who toppled the establishment?

Or is this just like every other narrative? That is: Subject to change depending on what generates the most clicks.