From a fiscal and monetary policy perspective, there were a couple developments that were cause for investor celebration. First, fiscal policy makers passed the American Rescue Plan Act of 2021.3 This $1.9 trillion spending bill included $411 billion in direct payments to individuals, which resulted in $1,400 being sent to individual
taxpayers earning up to $75,000 ($2,800 for married couples earning up to $150,000), plus an additional $1,400 per qualified child. The payments phase out for incomes up to $80,000 ($160,000 for married couples).4

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On the monetary policy side, the Federal Reserve did not make any new announcements, but the fact that they maintained their stance and reiterated they would do so for the foreseeable future, was noteworthy. In their March meeting, the Federal Open Market Committee (FOMC) released its “Summary of Economic Projections” which included its participants’ expectations that the federal funds rate would remain at 0% through at least 2022.5 Furthermore, the committee reiterated its stance of conducting $120 billion of bond purchases per month, a pace that was never reached heading into or out of the credit crisis of 2008-09. On March 19, the Wall Street journal published an article written by Jerome Powell in which he wrote, “But the recovery is far from complete, so at the Fed we will continue to provide the economy with the support that is needs for as long as it takes.” 6 That support continues to result in vast sums of money being pumped into capital markets and the economy.

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There were several other events that occurred during the quarter that reveal the unintended consequences of such abundant liquidity. In January, several so-called “meme stocks” sparked a revolution of sorts. The top performing of these was short-squeezed GameStop, which jumped over 1,000%. Traders launched a coordinated buying raid on the stocks of companies that were contending with an unusual amount of short-selling (the percentage of the company’s total market capitalization that has been sold short – expecting the stock price to go down). These raids in turn overwhelmed the supply of shares available to buy, leading to rapid price increases. Melvin Capital, a $12 billion hedge fund, came under liquidation pressure due to the meteoric rise of stocks like GameStop.7 The fund was down 53% in January due to their short exposure (attempting to profit from a decline in the stock price) and required a bailout from high profile investors such as Steven A. Cohen and Citadel.7

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Also at the center of the melee was the free stock trading app, Robinhood, a self-proclaimed champion for the small and first-time investor. The company came under scrutiny for the way it handled its customers’ ability to trade “meme stocks”, along with the hundreds of millions of dollars it generates from selling trade order flow to market makers. In the aftermath of the market dysfunction and Congressional hearings on the subject, Robinhood reassessed the animated celebrations on its app, ultimately deciding to remove the digital confetti which pops after users make their first trade.8

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Late in the quarter, Archegos Capital suffered tens of billions in losses in media stocks such as ViacomCBS, Discovery and Tencent after it was discovered the firm was engaged in highly leveraged speculative bets on these stocks.9 The firm was able to gear up its exposure to multiples of its actual capital base using over-the-counter synthetic stock positions, which is why the unwind caught the market off guard. Some of those hit hardest in the unravelling were Archegos’ counterparties, Nomura and Credit Suisse. Nomura’s stock price endured its largest daily loss in history after the estimated $2 billion in losses, as a result of exposure to Archegos, was disclosed.10 Credit Suisse disclosed a loss of $4.7 billion and announcement a dividend cut as a result.11

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Another seemingly unrelated issue effected investors in the $1.8 billion Infinity Q Capital Management mutual fund. The investment firm discovered that a portfolio manager altered the third-party valuation (and pricing) of swap contracts. The fund has suspended redemptions indefinitely while it unravels the issue.12 While all these events seem isolated and may lack the scale required to derail a global market recovery, there is a common thread: a trend to increasing levels of risk-seeking behavior and a reduced focus on risk management.