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GameStop and Investing for the Long Run

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Given the size of global financial markets, the frantic rise and fall in prices of stocks like GameStop has been limited, and there are few signs of major disruption.

What could derail the stock market? Lots of things, of course, including the possibility of opaque, systemic links between hedge funds that lost money to the short squeeze and sensitive global financial institutions. The collapse of a money-losing hedge fund – Long Term Capital Management in Greenwich, Connecticut – caused unexpected shocks in world markets back in 1998. But that is exactly what the regulators will be looking for now.

There has been a spate of IPOs, especially those of companies known as SPACs, which stand for special-purpose acquisition companies. My colleague Michael J. de la Merced has described them as “publicly traded Shell companies created solely to merge with a private company”. Many of these companies have traded with no profit or income, yet another indication that an easy money flood has created pockets of speculative money in the stock market that could lead to serious problems.

In the meantime, the long rally continues overall. It started in March when the Federal Reserve and other central banks launched a bailout that significantly increased the global money supply and pledged to do whatever it takes to maintain financial stability in the face of the economic downturn triggered by the pandemic. Tax incentives – large government spending programs – have offset some of the income of millions of unemployed and thousands of failing businesses. In the United States, more government aid is on the way when the Biden government has its way.

Thanks in part to the inflow of money, asset prices have risen across the board and interest rates remain exceptionally low. Big tech stocks like Apple, Microsoft, and Facebook, all of which have reported gains in the past few days, fueled the rally and helped make stocks expensive through historical measures. However, if corporate profits rise as expected – Mr Bernstein expects a 40 percent or more year-over-year increase in the face of the devastation caused by the pandemic in 2020 – the stock market appears to be less outrageously valued.

Low interest rates make stocks attractive compared to alternatives like bonds, say many strategists, but that could change. Katie Nixon, chief investment officer of Northern Trust Wealth Management in Chicago, said she expected the bull market to live on, but if the benchmark 10-year Treasury note return, which is now just over 1 percent, is 1.5 percent or would achieve more Even at 1.75 percent, there could be a violent reaction in the stock markets, similar to 2013 and 2016.

Such a surge is unlikely, but possible, as government statistics are likely to show an obvious spike in inflation in the months ahead – in large part because the sharp 2020 economic downturn kept prices low.

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Robert Dunfee