• York Investment & Finance

Global Markets Overview on North America: Will GameStop burst the Wall Street bubble?


By Elliot Sanders, Analyst at the York IFS Global Market Telegraph


Wall Street has had nothing short of a spectacular month as market volatility reached unprecedented levels. Wednesday 27th witnessed more than 24 billion shares being traded, which is higher than any levels seen during or since the 2007/08 financial crash [i], as retail investors targeted hedge funds such as Melvin Capital, committing “short squeezes” on heavily shorted Wall Street stocks GameStop and Blackberry among others [ii]. The retail investors, who grouped together on Reddit, first targeted GameStop as it was the most shorted stock on Wall Street at 140%, meaning that GameStop had the greatest potential for a short squeeze and therefore profits for the retail investors. On Wednesday alone, GameStop traded more than 11 million times as shares surged 135% [iii]. The GameStop episode is not just a big story because retail investors benefited and made huge profits at the expense of Wall Street, but because it highlights the current fragility of the market and concerns over an asset price bubble.


There has been growing fears that a bubble is forming on Wall Street as asset prices become further detached from asset valuations [iv]. In a recent Bank of America Fund Manager Survey, between 15 and 20 percent of fund managers consider a bubble on Wall Street to be the biggest tail risk above the COVID-19 vaccine rollout and a depressed bond market, such as the extent of their fears over overvalued assets [v]. One might argue that the current valuations are justified as negative real bond yields and stable 0.25% federal interest rates incentivise inflows into equity markets. But as Katie Martin puts it, the clearest sign that there is a bubble on Wall Street is that the three most 'in demand' assets: Bitcoin, Tesla and GameStop, have no link other than pure speculation whilst having weak, if any, underlying intrinsic values that do not in any way reflect their market valuations [vi]. Tesla may have the potential to be the leading car manufacturer globally in the future, especially as more governments look to impose new regulations promoting electric vehicles. However, with a price/earnings ratio of 1678x when the historic average for the S&P500 is somewhere between 20 and 30, even the most bullish investor would find it hard to justify such an inflated price [vii]. With the current market climate sharing common features with previous bubbles of low interest rates, stock valuations towering over earnings, runaway retail trading and rapid accelerations in equity gains [viii], the GameStop episode is a stark reminder of the potential bubble Wall Street may find itself in.


If investors were worried about a bubble on Wall Street before after the rallies in Bitcoin and sky-high asset values at the tail end of 2020, they certainly are now after the GameStop episode. The real impact of the GameStop episode will be the reaction of regulatory bodies and financial institutions towards retail investors. Some will argue that the retail investors were perfectly entitled to trade in a group organised on Reddit as financial markets are free markets, and Robinhood and Interactive Traders were wrong to restrict the trading of equities such as GameStop and AMC [ix]. On the other hand, others will argue that the actions of the retail traders were illegal as they manipulated the market, and if institutional investors did the same with Bloomberg chat messages, they would face regulatory action [x]. The NASDAQ CEO Adena Friedman said the NASDAQ would halt trading of stocks that are linked with unusual activity online [xi] in a clear sign of a tougher future stance. If the GameStop episode leads to tougher regulations on retail investors in the US such as limitations on options trading or a limit to the number of daily trades, then this could help to deflate the bubble.


This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 14.1 in early February 2021.


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Reference list: [i] https://www.ft.com/content/56658052-76fe-4910-8cb7-810039753f7c [ii] https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2 [iii] https://www.ft.com/content/56658052-76fe-4910-8cb7-810039753f7c [iv] FT News Briefing Podcast, 27/01/2021 [v] Bank of America Global Fund Manager Survey, December 2020 [vi] FT News Briefing Podcast, 27/01/2021 [vii] Thompson Reuters Datastream as of the 27/01/2021 [viii] https://www.ft.com/content/a790c796-f0c4-4cf9-8c7a-3b52daff89e4 [ix] https://markets.businessinsider.com/news/stocks/robinhood-to-allow-gamestop-amc-nokia-stock-purchases-2021-1-1030017533?utm_campaign=browser_notification&utm_source=desktop [x] https://www.ft.com/content/bcfb2252-f752-4177-a860-07dc66b0b9e8 [xi] https://markets.businessinsider.com/news/stocks/nasdaq-monitors-social-media-halts-unusual-trading-friedman-market-manipulation-2021-1-1030011156

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