Markets Experience Bumpy Ride
February 1, 2021
It’s been a somewhat volatile week for the equity markets, and we wanted to offer some perspective on what’s happening for our valued clients.
Last week’s selloff was the largest in three months for the three major U.S. stock indices – the S&P 500, the Dow Jones Industrial Average and the NASDAQ. Volatility was especially present, however, in a handful of stocks that experienced unusual activity involving a form of speculative investing called short-selling.
While all investment strategies contain some level of risk, short-selling, options trading, or going long on a stock, involves a level of risk typically most appropriate for sophisticated institutional investors. It is generally not consistent with achieving long-term financial objectives.
Short-selling is usually done by institutional investors, such as hedge funds, when they anticipate a stock’s price will drop. An investor borrows a stock, sells it, then buys the stock back to return it to the lender. The strategy works only if the stock’s price drops between the time the investor sells it and buys it back again, with the difference representing profit. Risks include the potential for unlimited losses if the stock’s price goes up, in addition to the cost of borrowing the shares and the fact the shares can be recalled.
So what happened this week? A group of individual investors decided to purchase shares of a few lower-valued companies, driving their prices unnaturally high. Some of the same companies had been identified by hedge funds as short-selling opportunities. This short squeeze contributed to volatility.
We hope this helps explains some of the recent headlines around volatility, which can be unsettling no matter the cause. We are monitoring the situation and encourage you to remain focused on your long-term objective.
We appreciate your trust in us.
The Gratz Park Private Wealth Team
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. An investment cannot be made in this index. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.
Material prepared by Raymond James for use by its advisors.