Redditors’ declaration of war on hedge funds may be ugly, but it won’t break the system, pros say

A wild week on Wall Street ended much as it started, with day traders pouring money into a handful of struggling stocks as the broader market swayed with volatility on concerns over vaccines, corporate profits and short sellers scrambling to regain their footing.

Retail investors — many of them newly minted, their market exposure aided by apps like Robinhood, and their limited education in the boisterous spirit of Reddit message boards — have continued to inflate the price of GameStop and other companies indexed by short sellers for failure, such as AMC Entertainment and Bed Bath & Beyond.

“That’s the pure definition of speculation,” said Brian Vendig, president of MJP Wealth Advisors.

The pros recognized that some aggressive short sellers could be burned past the breakout point, or even one or more hedge funds could crumble under the weight of stacking retail investors. Losses had already reached nearly $20 billion in total as of Friday’s market close.

“What happens that leads to volatility is that some institutions have to liquidate other positions to raise capital and cover their shorts,” said Jeff Buchbinder, equity strategist at LPL Financial.

There’s no denying that some of these day traders have made a lot of money over the past few days, often at the expense of professional investors. The David and Goliath narrative has been fueled by the boastful online jubilation of small investors who rejoice, just for a moment, to beat the pros at their own game.

While analysts said it would be foolish to completely rule out the prospect that soaring stock prices for GameStop and its peers could trigger a market meltdown, they agreed that such an outcome was highly unlikely. For retirement savers who don’t treat investing like gambling, the smartest thing to do is simply ride out market mood swings, they said.

“It’s not going to bring down giants like JPMorgan or Bank of America.”

“In terms of the fallout on the broader economy, I see extraordinarily low risks of this happening. It’s not going to bring down giants like JPMorgan or Bank of America,” said Mitchell Goldberg, president of ClientFirst. Strategy.”This is an isolated event that represents very small dollars relative to the broader market.”

The implications for long-term savers should be minimal, Goldberg said. “For your regular investor, this is a total and complete non-event,” he said. “Investors shouldn’t let this distract them from their long-term goals. Investors have bigger things to worry about,” he added, referring to the difficult deployment of the Covid-19 vaccine and the disappointing results of J&J’s highly anticipated candidate.

Vending pointed out that the markets have experienced anomalies, hiccups and other strange behavior many times over the years. “Maybe some of the volatility this week is caused by this frenzy, but there was always something that caused a bit of a stir among investors,” he said.

“When you think of the hundreds of millions of people who are investors, that’s still a small percentage of the overall market – but it’s an indication that technology and communication can have adverse consequences,” Vendig said.

A far more likely scenario than a sell-off, market watchers say, is that these hype-fueled valuations will implode and leave retail investors, including those with little more than a rudimentary understanding of market fundamentals. the investment, holding nearly worthless stocks they might have sunk hundreds or even thousands of dollars into.

Some professionals have criticized what they have called a “gamification” of Robinhood’s app-based platform. “Their investor base is younger and less experienced and many people might not understand the potential losses they could face,” Goldberg said.

“If people see it more as entertainment value and don’t understand there’s a risk, it could have a very negative side,” Vendig said. “People are going to learn what risk really means.”

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