In a Nutshell

Recently Eurostat announced that eurozone GDP contracted at an annual pace of 2.8% during the fourth quarter and 6.8% for all of 2020.  By comparison the U.S. economy grew at a preliminary annual pace of 4% during the fourth quarter, while declining much less than the eurozone for the year. Obviously, the spread of China’s coronavirus created significant economic damage around the world. 

Now China would have you believe that it is leading in worldwide economic growth.  CNBC reported that China’s GDP grew by 2.3% in 2020, while U.S. GDP contracted by 2.3%.  Illustrations were presented by CNBC showing China’s GDP growing faster than U.S. GDP thus indicating China’s GDP will likely exceed the U.S. GDP sooner than previously forecast.  The report projected that China might exceed U.S. GDP by 2026, two years sooner than economists’ previous estimate.  If much of the USA remains more restricted by Covid-19 than China that projection is believable.

The Wall Street Journal reported that while Britain and the U.S. had vaccinated 14.4% and 9.6% of their populations, respectively, France, Germany, Italy, and Spain had only vaccinated 2.3% to 3.4% of their populations. If, as reported, China had only vaccinated 1.7% of its vast 1.4 billion population that could negatively impact its GDP growth. Although Britain plans to vaccinate 60% of its population by June, the eurozone is lagging far behind Britain in vaccinations. As long as countries are dealing with Covid-19, impacted economies worldwide will be hampered in their growth.

On a brighter note the Commerce Department reported last week that factory orders rose 1.1% in December after rising 1.3% in November. Strong housing and automotive sectors continue to boost factory orders.  However, Ford announced last week that it is cutting the production of its popular F-150 pickup at two plants in Missouri and Michigan due to the global shortage of semiconductor chips for LED and OLED screens. GM, Nissan, and VW Group have also been forced to curtail vehicle production due to a shortage of semiconductor chips. Wall Street expects production back logs to remain unusually strong for many months due to ongoing tight new vehicle inventories.

A main driver of the stock market’s upside volatility has been equities that typically benefit from positive quarterly announcements which trigger subsequent news articles.  Sometimes positive analyst revisions and upgrades also trigger these favorable articles.  The bottom line is that companies who (1) post positive quarterly results, (2) exceed analyst consensus for sales & earnings estimates, and (3) provide positive guidance, typically create wave after wave of persistent buying pressure thereby overwhelming the stock pricing algorithms on Wall Street.

The trading mechanism on Wall Street has squeezed bid/ask spreads and caused trading algorithms to control security transactions with tighter bid/ask spreads. Recently, Wall Street (Reddit) has exposed the limitations of these trading algorithms, which can temporarily cause extreme stock valuations.  Specifically, Reddit users caused an incredible surge of retail orders to “squeeze shorts”, exposing inefficient pricing on Wall Street.

In the meantime, beware of those regulators who may have a vested interest in some of the players. New U.S. Treasury Secretary Janet Yellen reportedly received significant fees from Melvin Capital and Citadel before she became Treasury Secretary.  She called for a meeting with the Commodity Futures Trading Commission (CFTC), the Federal Reserve, and the Securities & Exchange Commission (SEC) to discuss the recent trading volatility caused by Reddit forum users.  The result might be “circuit breakers” or other trading restrictions being implemented.  The fact that Melvin Capital and Citadel were victims of the GameStop short squeeze just made key player interactions more interesting.  Any announced trading restrictions will likely be framed as a way to “protect the individual investor,” even though they might protect influential hedge fund friends more!