Show Transcript
Volatility is once again top of mind for many investors as social media-driven buying and selling continue. Anthony Okolie speaks with Jimmy Xu, Portfolio Manager, TD Asset Management, about the latest roller-coaster ride and what it means for your investment portfolio.
Print Transcript
[MUSIC PLAYING]
- The world has been engrossed by this phenomenon over GameStop this week, where a group of retail investors have banded together on social media to push shares of the stock higher and squeeze out wealthy investors who have been betting for the stock to fall. Jimmy, give us a quick recap of recent events.
- Hi, Anthony. Thanks for having me here. And you're absolutely right. This is exactly what's happening. It's turning out to be one heck of an epic battle between investors on one end, which is Reddit, investors on Reddit, and hedge fund investors who are betting for that stock to decline.
So what's happened so far is it seems like the battle between David and Goliath. And David certainly winning this battle, having a sent shares of GameStop up by more than 1,000% to its peak. And we are also seeing that there's huge amounts of volatility during the day in GameStop, where a stock will rise by 30%, 40%, and then also fall by 40%.
Where this ultimately ends up, no one really knows. But throughout history, when these things tend to happen, it typically doesn't end up very well.
And talk a little bit about volatility. Why have we seen this sudden spike?
- Yeah that's a really good question. I think a spike in volatility that you're referring to is in the VIX index. And what the VIX index is it's basically a fear barometer of how the market participants are feeling about uncertainty. And certainly this week, we saw the VIX index spike by over 62% in a single day, which is almost unprecedented. And that really tells me that the market is really worried about the uncertainty that this has caused.
So why is it that the market is worried? It's kind of fascinating. Obviously, GameStop and stocks like GameStop or AMC has huge amounts of daily movement. But I don't think that's what the market is concerned about, because that's a relatively small portion of the market.
What the market is really concerned is the contagion effect. So all of this has resulted in some estimates about $5 billion of losses incurred by these hedge funds. And you can't just walk away from those losses. You have to pay for them.
So for those hedge funds, from what we heard, mass amounts of losses. What they have to do is sell other parts of the portfolio that are typically higher quality of other stocks there's nothing to do with GameStop to pay for those losses.
So the market is really concerned that if these kind of dynamics continue, more losses will be suffered by these hedge funds. They will have to liquidate more of their portfolio causing this sort of feedback loop that creates a bigger sell off in the overall market. And that has got investors extremely concerned this week.
Thank you very much for that perspective, Do you think that volatility is here to stay at least in the short run?
- Yeah, that's a really good question. I think some of that volatility will continue to stay until this gets resolved. The contagion risk that I just talked about isn't going away any time soon. But I think what investors have to think about is to have a different time horizon perspective.
If you think about where returns are going to be a year out or two year out, it's probably not going to be influenced by what's going on with GameStop today. I think that's really important to keep in mind.
What I think will impact market returns going forward is still going to be how quickly can we open the economy, how quickly can we get people back into jobs, and how quickly can we spur demand again to levels that are sort of at the pre-COVID levels.
So sitting here today, I think compared to where we were at any point after March last year, I think the path to that type of world is much clearer which means that investors should be more confident that we're getting closer to the end. Therefore, I think overall, volatility this year on average should be lower than where it was last year.
But having said that, the fact that we're still sitting here, we can't shake hands. We can't grab a drink in a bar. You can't even go eat at a restaurant. It seems like there's still considerable uncertainty and a wide range of outcomes that could happen.
We're worried about the pace of distribution of vaccines, which has been, I would say, quite uneven across the globe. We're even worried about whether the vaccines will work on new variants. And new variants really pop up every month so there's a lot of uncertainty and unknowns.
So I know the stock market is trading basically close to all time highs. Given those kind of uncertainty, I think volatility, well, won't be lower than last year, but it's going to be elevated compared to pre-COVID levels.
And I know you and I've talked in the past about the importance of investors not panicking when they see volatility rising. How can these investors insulate themselves from these types of events?
- Yeah, I think this is a really good example of why you need a very strong and diversified portfolio. So you don't end up in a situation where you're back into a corner without really a way of exiting at reasonable prices. And as portfolio managers, that's what we think about a lot day in and day out.
We look at our portfolios. We think about the risk factors that are exposed to these portfolios and whether they're acceptable or risks that we want to take.
So for some of the hedge funds unfortunately that are involved in this, they sold short stock for GameStop that's typically smaller in a market cap. And those are popular shorts as well amongst many hedge funds. So when this position turns against you, there's actually a very small opening for them to escape. And that's a position that you don't want to be in.
So I think from an investor perspective, the best way to insulate themselves from this type of volatility is to not be in there in the first place.
- And one of the things we've talked about is that investors can benefit from volatility. Talk to us a little bit about that.
- I think what's missing in this entire narrative is what's happening underneath, on the fundamental side. We're going to earnings season. And we're seeing companies like Apple, Microsoft, Tesla, even JP Morgan post record Q4 earnings. And remember we're still in a lockdown. And I think that shows the strength of and the fundamentals of these businesses.
But unfortunately, again, what's going on with GameStop and the contagion risk, those stocks have sold off too. So we basically have taken this opportunity to allow us to quietly buy these stocks that have very strong fundamentals, very strong growth profile at lower prices. And that's what we do in our portfolio. And I think that's a great way for us to help our investors not only insulate them from this volatility but also add value over the long run.
- So given what we've seen, what does all of this mean for investors over the long term?
- I think it's really important for investors to look at the bigger picture. What's going on with GameStop is obviously dominating headlines. But again, that's not going to be the narrative for the market for 2011, 2012 and going forward.
If you think about it, what's happening now is governments and central banks globally are trying everything that they can to reflate the economy after the last part of the last year. And this means everything from negative rates to QE programs to buying enormous amount of assets, injecting liquidity, to even handing money to individual investors to try to spur demand and reflate the economy.
And that's inherently very bullish for the economy, for the stock market. And if you're a long term investor, that's just great. And the fact that we're seeing these type of bubbles forming in smaller pockets of the market, that's actually a sign to us that we're in a bull market. Typically, you don't see these irrational behaviors during times of stress.
So I think if we have a long term horizon where you're investing alongside with a market in that time of growth, this is a great time to be in equities.
Well, certainly this saga is going to continue. And we're certainly going to continue to monitor it. Jimmy, thank you very much for joining us today.
- My pleasure.
[MUSIC PLAYING]
- The world has been engrossed by this phenomenon over GameStop this week, where a group of retail investors have banded together on social media to push shares of the stock higher and squeeze out wealthy investors who have been betting for the stock to fall. Jimmy, give us a quick recap of recent events.
- Hi, Anthony. Thanks for having me here. And you're absolutely right. This is exactly what's happening. It's turning out to be one heck of an epic battle between investors on one end, which is Reddit, investors on Reddit, and hedge fund investors who are betting for that stock to decline.
So what's happened so far is it seems like the battle between David and Goliath. And David certainly winning this battle, having a sent shares of GameStop up by more than 1,000% to its peak. And we are also seeing that there's huge amounts of volatility during the day in GameStop, where a stock will rise by 30%, 40%, and then also fall by 40%.
Where this ultimately ends up, no one really knows. But throughout history, when these things tend to happen, it typically doesn't end up very well.
And talk a little bit about volatility. Why have we seen this sudden spike?
- Yeah that's a really good question. I think a spike in volatility that you're referring to is in the VIX index. And what the VIX index is it's basically a fear barometer of how the market participants are feeling about uncertainty. And certainly this week, we saw the VIX index spike by over 62% in a single day, which is almost unprecedented. And that really tells me that the market is really worried about the uncertainty that this has caused.
So why is it that the market is worried? It's kind of fascinating. Obviously, GameStop and stocks like GameStop or AMC has huge amounts of daily movement. But I don't think that's what the market is concerned about, because that's a relatively small portion of the market.
What the market is really concerned is the contagion effect. So all of this has resulted in some estimates about $5 billion of losses incurred by these hedge funds. And you can't just walk away from those losses. You have to pay for them.
So for those hedge funds, from what we heard, mass amounts of losses. What they have to do is sell other parts of the portfolio that are typically higher quality of other stocks there's nothing to do with GameStop to pay for those losses.
So the market is really concerned that if these kind of dynamics continue, more losses will be suffered by these hedge funds. They will have to liquidate more of their portfolio causing this sort of feedback loop that creates a bigger sell off in the overall market. And that has got investors extremely concerned this week.
Thank you very much for that perspective, Do you think that volatility is here to stay at least in the short run?
- Yeah, that's a really good question. I think some of that volatility will continue to stay until this gets resolved. The contagion risk that I just talked about isn't going away any time soon. But I think what investors have to think about is to have a different time horizon perspective.
If you think about where returns are going to be a year out or two year out, it's probably not going to be influenced by what's going on with GameStop today. I think that's really important to keep in mind.
What I think will impact market returns going forward is still going to be how quickly can we open the economy, how quickly can we get people back into jobs, and how quickly can we spur demand again to levels that are sort of at the pre-COVID levels.
So sitting here today, I think compared to where we were at any point after March last year, I think the path to that type of world is much clearer which means that investors should be more confident that we're getting closer to the end. Therefore, I think overall, volatility this year on average should be lower than where it was last year.
But having said that, the fact that we're still sitting here, we can't shake hands. We can't grab a drink in a bar. You can't even go eat at a restaurant. It seems like there's still considerable uncertainty and a wide range of outcomes that could happen.
We're worried about the pace of distribution of vaccines, which has been, I would say, quite uneven across the globe. We're even worried about whether the vaccines will work on new variants. And new variants really pop up every month so there's a lot of uncertainty and unknowns.
So I know the stock market is trading basically close to all time highs. Given those kind of uncertainty, I think volatility, well, won't be lower than last year, but it's going to be elevated compared to pre-COVID levels.
And I know you and I've talked in the past about the importance of investors not panicking when they see volatility rising. How can these investors insulate themselves from these types of events?
- Yeah, I think this is a really good example of why you need a very strong and diversified portfolio. So you don't end up in a situation where you're back into a corner without really a way of exiting at reasonable prices. And as portfolio managers, that's what we think about a lot day in and day out.
We look at our portfolios. We think about the risk factors that are exposed to these portfolios and whether they're acceptable or risks that we want to take.
So for some of the hedge funds unfortunately that are involved in this, they sold short stock for GameStop that's typically smaller in a market cap. And those are popular shorts as well amongst many hedge funds. So when this position turns against you, there's actually a very small opening for them to escape. And that's a position that you don't want to be in.
So I think from an investor perspective, the best way to insulate themselves from this type of volatility is to not be in there in the first place.
- And one of the things we've talked about is that investors can benefit from volatility. Talk to us a little bit about that.
- I think what's missing in this entire narrative is what's happening underneath, on the fundamental side. We're going to earnings season. And we're seeing companies like Apple, Microsoft, Tesla, even JP Morgan post record Q4 earnings. And remember we're still in a lockdown. And I think that shows the strength of and the fundamentals of these businesses.
But unfortunately, again, what's going on with GameStop and the contagion risk, those stocks have sold off too. So we basically have taken this opportunity to allow us to quietly buy these stocks that have very strong fundamentals, very strong growth profile at lower prices. And that's what we do in our portfolio. And I think that's a great way for us to help our investors not only insulate them from this volatility but also add value over the long run.
- So given what we've seen, what does all of this mean for investors over the long term?
- I think it's really important for investors to look at the bigger picture. What's going on with GameStop is obviously dominating headlines. But again, that's not going to be the narrative for the market for 2011, 2012 and going forward.
If you think about it, what's happening now is governments and central banks globally are trying everything that they can to reflate the economy after the last part of the last year. And this means everything from negative rates to QE programs to buying enormous amount of assets, injecting liquidity, to even handing money to individual investors to try to spur demand and reflate the economy.
And that's inherently very bullish for the economy, for the stock market. And if you're a long term investor, that's just great. And the fact that we're seeing these type of bubbles forming in smaller pockets of the market, that's actually a sign to us that we're in a bull market. Typically, you don't see these irrational behaviors during times of stress.
So I think if we have a long term horizon where you're investing alongside with a market in that time of growth, this is a great time to be in equities.
Well, certainly this saga is going to continue. And we're certainly going to continue to monitor it. Jimmy, thank you very much for joining us today.
- My pleasure.
[MUSIC PLAYING]
