By Leon Gauhman, chief strategy officer and co-founder at digital product consultancy Elsewhen, explains what market players need to learn from the GameStock revolt and its continuing aftershocks.
Anyone who thought they understood the turbulent crosswinds of the global stock market will have been caught off-balance by the events of 2021. Even in a sector famed for its cyclonic peaks and troughs, the past three months have been a wild ride.
First we had investors forced to recalculate company prospects based on government economic stimuli, mutant strains and vaccine roll-outs. A growing appetite for digital and green tech has added a layer of pressure to the maelstrom, with investor confidence see-sawing between sought-after emerging tech and struggling energy shares.
Powerful investment banks and hedge funds have scarcely helped the situation, with Wall Street’s behaviour – shorting stocks, buying stakes in firms and pumping out speculative target share prices – whipping up further headwinds.
The biggest curveball of all, however, is reserved for the recent GameStop (GME) saga, with a dizzying face-off between hedge funds and Reddit upstarts. Hedge funds driving the company’s price down were met by a Reddit-organised fightback, igniting the most dramatic share price rebound in recent history for the video game retailer.
Reddit’s intervention caught the financial establishment off guard – and quickly led to a regulatory probe in the US. But it would be a mistake to suppose that this is a one-off twister, now safely in the past. After the initial groundswells of January and February, GameStock’s stocks have since fluctuated again, with the company appointing activist investor Ryan Cohen as chairman to spearhead market momentum.
The reality is, there’s a new dynamic at play in global market trading. Whether they like it or not, hedge fund investors are now locked into an ongoing battle with day traders, who in turn are spurred on by the collective action frenzy of groups such as Reddit’s Wall Street Bets (r/WSB).
Here are five key takeaways from the GME revolt that market players need to be aware of, in navigating the months ahead.
1.Retail investors are a new economic force: Immediately after organising the GME fightback, Reddit community r/WallStreetBets saw its member base rise from around 1 million to 6 million. True, some of these new users will simply be there for the thrill of it, and others will think they are buying into the next dotcom/bitcoin/get-rich-quick scheme. But there is no question that this represents a radical and unstoppable dynamic that cannot be ignored. The power of retail investor collective action is that no one knows where they will strike until it’s too late – viz the run on silver. Hedge fund managers will need to take this into account when assessing shorting options.
2. The stock market is breaking away from the real economy: A popularity vote is sweeping across the globe, Mexican-wave style – and defying what has traditionally been considered logical market behaviour. It is possible, for example, to view the Reddit-led fightback as just the latest symptom of a dysfunctional stock market – more akin to a Las Vegas poker room than a benchmark for business and economic health. The Washington Post captured this neatly, when it pointed out that 2020’s record stock market rise came amid a surge in infection rates and a growth in the number of poor, hungry, unemployed people. If you don’t accept that the markets are a delusion, you might argue that they are increasingly driven by projections about where the economy will be in the mid-term future – which would explain why Tesla and Bitcoin have achieved such remarkable valuations. This is a more positive perspective but still underscores a risky disconnect between stock market investment and real world economics.
3. Millennials and Zoomers are rewriting the rules: Wealth management firms are increasingly chasing after younger digital-savvy customers – but in doing so they might just be weaponising an existential threat to the financial establishment. Unlike the passive Boomer generation, millennials and Gen Z are not prepared to just go along with stock market rules and traditions. Instead they are learning how to exploit the market’s gaps/failings/opportunities in the same way that established players have always done. This threatens to break institutional investors’ monopoly over the trading space forever.
4. From Qanon to WSB – the rise of social media activism: Like Donald Trump and Q-anon, the Reddit/GME story is another example of the unforeseen consequences of the mobile phone/social media boom. Digital savvy individual investors are now capable of gathering and coordinating information on social media to execute trade orders via the scroll of a thumb. At the same time, social media is driving the rise of memes in money. Memes and Reddit’s own “technical” language can move the hearts and minds of the retail investor swarm, creating momentum behind any idea that gains popularity on the board. That can be further enhanced if someone like Elon Musk also pipes up. Maybe the next step will be retail investor activism – groups of traders seeking to influence decisions based on corporate ethics, not just the prospects of making a few thousand dollars on a stock price swing.
5. New respect for retail investor professionalism? It’s easy to characterise retail investors as chancers – ill-equipped to make nuanced financial judgements about companies. But this amateur vs professional distinction has looked pretty fragile since the mess that major financial institutions made of the global economy in 2008. The scandal around Greensill and the Archegos fiasco are additional evidence that the banking sector can no longer simply rely on its venerable history as a kitemark of quality or competence. Maybe, the emergence of organised structures for retail investors will provide the first step towards a professionalism that is often sadly lacking from their more established counterparts.
Final thought
Going after short sellers so aggressively has led to some pushback against retailer investors – but who is to say they are wrong? There is evidence that shorting, aside from being detrimental to the prospects of individual companies, is an ineffective strategy. Similarly, it’s just possible that the r/WSB investors who piled into GME may be proved right. They have handed a lifeline to the company, giving it an opportunity to pivot to digital. If that succeeds, r/WSB will have played a legitimate strategic role in revitalising a company and creating job opportunities – which is rarely high on hedge fund agendas.
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