A Day After Worries of a New Short Squeeze, Investors Rally Back

Clearing away the carnage wrought by last week’s short squeeze, Wall Street now looks to book profits, though volatility remains.

A man walks past the Charging Bull statue in New York’s financial district during a snowstorm on Monday. (AP Photo/Mark Lennihan)

MANHATTAN (CN) — Wall Street is primed for a rally this week, now firmly in the clear of the machinations that bedeviled investors with huge losses, but some worry of downward spirals still to come.

The Dow Jones Industrial Average gained 476 points on Tuesday, a 1.5% increase in an afternoon where the high eclipsed 600 points. The S&P 500 and Nasdaq had similarly good days, both gaining about 1.5%. 

Some analysts say the gains are likely just investors “buying the dip” after last week’s plunge.

“One could argue that normal service has resumed as the established players are buying back into stocks,” wrote David Madden, a market analyst at CMC Markets. “Wall Street seems to be getting its grove back in the wake of the short squeeze saga, something it is unlikely to forget anytime soon.”

Markets abroad signaled at a good Tuesday before the closing bell in the United States. The markets in Germany and France pulled in gains of 1.5% and 1.8%, respectively, while the pan-European Stoxx 600 gained nearly 1.3% for the day. Nearly all Asian markets also ended the day positively, with those in South Korea and Australia leading the way.

For many, however, the whipsaw on Wall Street portends greater volatility in the weeks to come.

“As we’re just getting back what we just recently lost we are basically back to square one,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group in an email. “I’m not sure yet what it means but I do expect elevated volatility to remain.”

Last week retail investors boosting GameStop and several other dormant stocks caused markets to flail, with indices having their worst week since October. While markets soon corrected, a similar albeit smaller short squeeze — this time involving silver, futures of which rallied more than 8% — caused some investors to worry about another round of massive losses.

Fortunately, for some, those losses never materialized, with all three exchanges posting positive gains, most notably the Nasdaq snagging a 2.5% increase. Meanwhile, shares of GameStop and AMC Entertainment, two of the most notably culprits in last week’s short squeeze, ended trading on Tuesday down 60% and 41%, respectively.

The run on silver, a notoriously volatile asset, could continue. “Looking ahead, the trend in silver is bullish,” wrote Tom Essaye of the Sevens Report in a Tuesday morning investor’s note, adding that it is not unreasonable to see silver reach $80 per ounce in a longer timeframe.

Investors also were likely cheered by more optimism about the second half of 2021. In a Monday report, the Congressional Budget Office upgraded its U.S. economic outlook, predicting gross domestic product growth will rapidly recover and the economy will return to its pre-pandemic size by the middle of this year.

GDP will grow by 3.7% this year, then taper to an average of 2.6% growth over the next five years, the CBO predicts. The nonpartisan organization also expects inflation to rise above 2% only after 2023. The Federal Reserve has said it would not raise interest rates until average inflation exceeded 2% for a long enough period.

The change from the CBO’s last outlook, published last July, is because “the downturn was not as severe as expected and because the first stage of recovery took place sooner and was stronger than expected.” 

As a result, the CBO also downgraded its outlook for the 2026–31 period — now pegging GDP growth at 1.6% annually — though the agency noted the path of the pandemic could once again change the effects on productivity, the labor force and technological innovation.

The CBO also predicts the $900 billion stimulus package passed last year would boost real GDP growth by 1.5% in 2021 and 2022, though “the bulk of the impact” will happen this year. 

Deficit hawks have been trying to corral the Biden administration’s $1.3 trillion stimulus proposal, though the White House argues “the danger now is not in doing too much, it is in doing too little.”

Some experts have been bullish on the U.S. economy in the latter half of 2021. Jason Furman and Wilson Powell III of the Peterson Institute of International Economics wrote last week that the U.S. economy has a whopping amount of excess savings stashed away due to higher incomes in 2020 and reduced consumption. “This leaves households with an additional $1.6 trillion in additional savings,” they wrote, adding that the contraction in the U.S. GDP was “less bad” than for other advanced economies like France and Germany.

A precious few earnings reports presented the now-usual messy picture for investors. Energy giants ExxonMobil and British Petroleum were predictably mediocre. The past year has been extremely harsh for oil companies, due to the confluence of Covid-19 shutdowns and an oil price war between Saudi Arabia and Russia.

While BP pulled in $1.4 billion in its fourth quarter, compared with a $500 million loss in its third quarter, the energy company reported a $5.7 billion total loss over 2020, nearly $1 billion higher than what many had expected.  

Similarly, Exxon posted its fourth straight quarter of losses, this time to the tune of more than $20 billion. In a statement, CEO Darren Woods called 2020 “the most challenging market conditions ExxonMobil has ever experienced.”

Other sectors have profited, though. In its earnings release, Pfizer reported nearly $11.7 billion in fourth quarter revenues, a 12% year-over-year increase.  

Pfizer captured headlines in late 2020 when it became the first company, along with German partner BioNTech, to receive emergency authorization for its Covid-19 vaccination. The company now promises 200 million doses of its vaccine by May, earlier than original forecasts.

“Our record-breaking success at developing a vaccine against COVID-19, along with our partner BioNTech, is just one example of what we believe this new Pfizer is capable of achieving,” Dr. Albert Bourla, the company’s CEO, said in a statement.

Cases of the virus continue to march along unimpeded, though hospitalizations seem to be dropping.

According to Johns Hopkins University, more than 103 million cases of Covid-19 have been reported worldwide, with more than 2.2 million deaths. In the United States, 26 million Americans have contracted the disease, while more than 444,000 have died.

%d bloggers like this: