“Exciting” isn’t the word most people use when describing market and investment conditions, but it fits the description for the first half of 2021.
GameStop dominated the news cycle for weeks, and its controversy culminated in congressional hearings.
Distant relatives morphed into CNBC commentators as they waited for the price of Dogecoin to skyrocket after Elon Musk’s appearance on Saturday Night Live.
If you missed these developments, you’re in luck. We have the highlights. Some might be worth discussing with a trusted advisor, while others are more entertaining in the Dutch-tulip-bulb mania sense – at least from an outsider’s perspective. (Tulipmania refers to a famous Dutch bubble and crash in the mid-1600s where speculation drove the value of tulip bulbs to extremes.)
What do AMC and GameStop have in common?
If you answered fierce competition to their business model from disruptive technologies, you’d be correct, but we are not talking about business fundamentals.
In January, the investing public was shocked to see shares of GameStop surge in pricing as internet forum users on Reddit coordinated buying to punish hedge fund managers who had shorted GameStop shares.
At the start of the year GameStop was trading at $17.25 per share before reaching a high of $483 at the peak of Redditor mania.
The phenomenon has proven to have legs with GameStop still trading in the low $200s as of this writing.
Back in 1990, economists Eugene Fama and Kenneth French set out to determine whether some stocks had characteristics that allowed them to consistently outperform the market – perhaps not in every quarter, but more often than not.
This research led to the discovery of the small-cap premium which highlighted the performance of small and value companies. This premium was fairly understood until the financial crisis of 2008. Since then, growth companies like Facebook and Amazon have outperformed small-cap value. That was until the first two quarters of 2021 when small-cap value outperformed growth stocks by its widest margin in decades.
If you didn’t know about cryptocurrencies and blockchain prior to 2021, you have most certainly heard about them by now. Bitcoin began its meteoric rise in the fall of 2020 from $11,000 to a peak of roughly $63,000 this past April.
Due to myriad issues, it has since declined to the mid-$30,000s, but not before dragging up every other cryptocurrency – from the theoretically practical Ethereum to the absurd Dogecoin – in its wake. To add to the FOMO (fear of missing out) speculation in cryptocurrencies, NFTS (non-fungible tokens) of memes and other internet artifacts are being sold for hundreds of thousands of dollars.
Residential real estate
In May, the median price for existing homes surpassed $350,000 for the first time.
In keeping with the times, there are numerous factors driving the intense residential real estate market.
Some of these factors are well understood and uncontroversial: shutdowns leading to a lumber shortage and slowdown of new home construction, young renters wanting to transition to home ownership, etc.
Others are more controversial and may have long-tail effects, such as the increased interest of institutional money managers in home rentals and NIMBYism (not in my back yard).
It’s not clear how large a role investment firms are playing in the housing market, but they caught headlines in April when it was revealed that entire neighborhoods may be up for grabs with Fundrise LLC purchasing a neighborhood of 124 rental homes in Texas last winter.
Additionally, economists on both sides of the political aisle have argued that NIMBYism has played the biggest role in housing constraints with current homeowners not wanting to live by the various housing developments that could alleviate some of the supply constraints.
NIMBYism is the housing equivalent of the nuclear energy problem. All reasonable people know it’s an important and emission-free energy source, but no one wants to live by a nuclear reactor (with the exception of our wonderful community).
Similarly, everyone likes the idea of reasonable housing prices, but no one wants to live by an affordable architectural style that risks lowering their own home’s value.
“The reports of my death are greatly exaggerated.” This could be either a quote from Mark Twain or the disembodied voice of inflation with May’s Consumer Price Index up 5% year-over-year. This was the largest increase since August 2008.
What remains to be identified are the elements of this inflation that are transitory versus sticky. Transitory inflation would include items for which there is a supply and demand disconnect. Think of the aforementioned lumber prices and food stuffs at the grocery store.
A portion of the present price increases is due to a disconnect of pent-up demand and the supply constraints of getting mills and processing facilities back into full production. The real question is which parts of the price increases are sticky and here to stay.
Employee wages are certainly at the top of the list when it comes to increases in sticky prices. These increased costs likely will be passed on to consumers.
Nicholas Haberling is a partnership advisor at Community First Bank & HFG Trust in Kennewick.
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