Why the GameStop Explosion Won’t Destroy the Stock Rally

OK, so did last week’s Robinhood-Reddit-GameStop market turbulence sound the death knell for this bull market? Is that a bubble we hear popping?

Naaaah, says Jack Ablin, the well-regarded CIO and founding partner of Cresset Capital, who used to head investments at BMO Harris Bank and Bank of Boston (now part of Bank of America).

“While pockets of speculation could be creating a bubble, we don’t believe the blowback would impair the entire market or financial system,” he wrote in a commentary. The novice investors who are bidding up GameStop’s price to the troposphere lack the resources to impair the system, he argued.

Make no mistake, though, this rebellious bunch has created a disturbance in the investing world, he pointed out. “Robinhood investors working together have amassed important buying power,” he found. The Robinhood website says it has 13 million customers with an average account size of $1,000 to $5,000. Hence, their collective buying power is between $13 billion and $65 billion.

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“This thundering stampede has disrupted the institutional marketplace, taking seemingly rational investments and turning them upside down,” he said. The beneficiaries have been momentum stocks and penny stocks. And, of course, the novice online traders have damaged established players who have shorted the likes of GameStop.

This rebellion was one factor in last week’s 3.3% drop in the S&P 500. But Monday’s rebound, at midday, up 1.5%, illustrates the temporary nature of the recent slide.

While all this speculation has made the market seem like a bubble, in danger of bursting, Ablin indicated several factors that would prevent such a fate. Although some parts of the economy are weak—for example, about 2.5 million fewer food service jobs exist now than were around pre-pandemic—other parts are strong. Personal income and household savings are near record levels, with nearly $5 trillion in money market funds.

Second, he continued, the capital markets are awash in unprecedented liquidity, the result of aggressive Federal Reserve steps and fiscal support from the federal government. Bond yields are at historic lows and high stock valuations excesses could last for a long time.

“At the same time,” he wrote, “emboldened retail investors are not about to hide under their covers in the event of a selloff.” Likely, they’d use it as a buying opportunity, he predicted.

“Goals-based investing isn’t as exciting as speculation,” Ablin noted, “but it’s certainly better for getting a good night’s sleep.

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Tags: bubble, Cresset Capital, Federal Reserve, GameStop, Jack Ablin, Liquidity, money market funds, Reddit, Robinhood, savings, sell-off, speculation

Carlos Rangel

Carlos Rangel has been named vice president and CIO of the $8 billion W.K. Kellogg Foundation (WKKF), effective today. Rangel, who will also serve as a member of the executive council and report to president and CEO La June Montgomery Tabron, replaces Joel Wittenberg, who retired at the end of January after 11 years at the foundation, saying he would go into consulting.

Rangel, a member of CIO magazine’s Class of 2017 Forty Under Forty, joined WKKF as a portfolio manager in 2010 and was most recently director of investments. He will be responsible for the management and oversight of the foundation’s endowment and the W.K. Kellogg Foundation Trust investments, as well as investing the diversified portfolio to maintain its ability to support WKKF’s long-term mission. Rangel will also provide leadership for team execution and quality performance against allocation targets and shape research and analysis toward fact-based improvements to short- and long-term asset allocations.

“Carlos made a personal commitment many years ago to spend his career putting the financial markets to work for the benefit of society and understands that every dollar the foundation earns on our investments improves conditions for children,” Tabron said in statement. “He also has been a leader for WKKF toward broadening the adoption of racial equity within the financial sector and business community, while generating more dollars for grants.”

Prior to joining WKKF, Rangel worked for boutique investor Managed Assets Portfolios as a buy-side generalist analyst and focused mainly on small-and mid-cap technology stocks. He was responsible for idea generation, primary research, and financial analysis for each of the companies recommended.

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In a 2017 interview with CIO, Rangel indicated a bias toward active management over passive investment, saying there was an ongoing “arms race” to consistently deliver excess returns net of fees.

“Passive investing still reflects a view of the world given the construction of passive benchmarks that overweight the largest names,” Rangel said. “You cannot just set it and forget it if you are investing passively.”

He also said he places a high priority on risk management tools and processes, which he said “have added a new dimension to our awareness with a quantifiable impact on our decisionmaking.”

Rangel has bachelor’s and a master’s degrees in finance from the University of Michigan-Dearborn, and he is certified as a chartered financial analyst (CFA), financial risk manager (FRM), chartered analyst of alternative investments (CAIA), and has a certificate in investment performance measurement (CIPM).