If you have been trading in the market for anytime over a year, then you have likely witnessed stock movements that seemed nonsensical and illogical. However, this is far from the truth; the reality of the market’s current situation is that more forces than usual are acting in the economy and in greater magnitude. This is why in the modern market there is an even greater need than before to pay close attention to current events in both local and global settings.
The Pandemic Effects on the Global Economy
The first thing to look at is the most obvious one, the pandemic’s effects on the global economy, particularly that of the United States. This is where we find the main inconsistency, in almost a cause and effect reversal, where things like the S&P 500 are trading at all-time highs despite the weakened economy. An unprepared trader might have readied for losses and missed on the massive upside of growth that the market benefited from if they did not pay attention to the Federal Reserve. The U.S. government has decided to artificially prop up the market by using the Federal Reserve to buy trillions of dollars worth of bonds throughout the year. Keeping up with the government’s actions will not only prevent traders from getting caught on the wrong side of a trade, but it will even enable them to take positions that are backed by, via proxy, by the government’s buying power.
Another topic that must be touched upon is hedge funds and the actions that they take. The most prominent example of this is the well-known hedge fund GameStop incident. Although this situation was well documented, a quick summary will show why paying attention to what hedge funds are doing can produce a massive profit. One of the main actors for this phenomenon was Melvin Capital, a hedge fund that over-leveraged itself in betting on GameStop’s failure. Smart retail traders over at an infamous Reddit forum called Wallstreetbets artificially raised the stock’s price by buying and holding as many shares as possible ensuring that in order for Melvin Capital to get out of their positions, they would have to buy back the shares at enormous losses. This increasing demand and diminished supply triggered a short-squeeze that saw GameStop’s share price reach over $450.
Consider the Fundamentals
For a time, fundamentals like P/E ratios were looking like a thing of the past. Companies’ share prices were reaching levels far beyond even their projected growth and a strong bull market ruled over most trading days. However, that does not mean that market sentiment and external factors are any more important than fundamentals. Basics will still play a big role in how traders, both hedge funds and retail, will invest their portfolios.
What About the Federal Reserve?
By now most traders would have noticed that the bull market that has been going strong due to the government’s assistance is starting to look rocky and uncertain, and it should come as no surprise. The Federal Reserve holds no secrets and freely shows its balance sheet. Some Federal Reserve officials have signaled what many feared, that they have begun tapering. In other words, they have started to pull back the stimulus that they injected into the economy as the pandemic’s restrictions are coming to an end. This move will be one of great magnitude since the Federal Reserve has managed to add over $4 trillion to its balance sheet from the increase in bond purchases. Interest rates will increase, but traders that have been paying attention to the news cycle will be able to breeze through the situation.
These are just a fraction of the forces and events that shake and create the market, so if a trader is only looking at the numbers, they will be liable to make mistakes that could have been avoided. There really is no doubt that in order to be able to make the best investment choices in the current market, a trader will have to keep an eye on both the government’s actions and retail sentiment. Luckily, most people are already aware of current events and can use that to their advantage. If you’re not, then you might see some benefits from a bit of browsing in the news section of your favorite newspaper.