Year in Review: Three once in a lifetime stock market events during the pandemic
March 15, 2021
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Year in Review: Three once in a lifetime stock market events during the pandemic
On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic.
The world was sheltered in place and had the expectation that things would return to normal within a few weeks. A year later, nothing is normal, and there have been 119,000,000 cases of COVID-19 and 67,400,000 deaths worldwide. Our sense of normal hinges on the rickety vaccination rollout from Johnson & Johnson (NYSE: JNJ), Moderna (NASDAQ: MRNA), and Pfizer (NYSE: PFE).
COVID-19 is not “just a public health crisis;” Dr. Ghebreyesus accurately predicted that COVID-19 was a “crisis that will touch every sector.” We have had at least three “once in a lifetime” events in the stock market since the COVID-19 pandemic started.
Trading was halted four times in 9 days
On March 9, 2020, two days before the pandemic declaration, a level 1 circuit breaker was triggered in the first hour of trading, halting trading market-wide on stocks for fifteen minutes. On March 12th and again on March 16th, massive selling tripped circuit breakers in the first hour of trading. A fourth occurrence happened on March 18th, later in the trading day. Although the market was already on shaky ground in the weeks preceding the halts, the halts surprised everyone because it was the second time in the twenty years since they started, that a circuit breaker was triggered.
The Securities and Exchange Commission (“SEC”) adopted circuit breakers in October 1988 in response to Black Monday, October 19, 1987, when the S&P 500 lost over 20% in one trading day. Circuit breakers are automatic trading halts caused by “significant market declines” designed to calm the market. Initially, the circuit breakers were set by a point decline. Interestingly enough, a small 350-point decline prematurely triggered the circuit breaker in October of 1997.
After determining that point declines as a measure of stress in the market were ineffective, the SEC moved to percentages. A level 1 trading halt will stop trading for fifteen (15) minutes if the S&P 500 drops more than 7% from the previous day’s closing price. If trading starts again and the S&P 500 drops 13% from the previous trading day’s close, the market will stop trading again for 15 minutes. A level 3 will trigger a 20% decline from the previous day’s close of the S&P 500 which will stop trading for the day.
The Price of Oil Crashed
The stay-at-home orders and work stoppages to curb the spread of COVID-19 drastically reduced oil demand. In mid-April, Analysts warned that storage capacity for oil could be reached within weeks.
The West Texas Intermediate (WTI) Light Sweet Crude Oil futures are the benchmark for the United States oil market. WTI Futures contracts are for 1,000 barrels of crude delivered to Cushing, Oklahoma. Cushing is the delivery location for the world’s most actively traded futures contract boasting 90 million barrels of storage capacity, accounting for 13% of the United States storage.
Capacity is essential to futures contracts because they require actual delivery of the product. If no storage capacity exists, then the commodity is “effectively worthless.”
On Monday, April 20, 2020, West Texas Intermediate (WTI) for May delivery effectively became worthless, closing at negative $37.63 per barrel. This crash was unprecedented. This crash was short-lived as the next month’s delivery prices remained above $20 per barrel. A year later, WTI Crude for April 2021 delivery closed at $65.56 per barrel on Friday, March 12, 2021.
Our eyes were watching GameStop
The “world’s largest video game retailer,” much like all retailers, was struggling before 2020. However, as millions of people moved indoors and needed video games to keep them entertained, GameStop quickly became their go-to.
Despite the pandemic surge, in a November 2020 scathing letter to the Board of Directors, Ryan Cohen, a 9.98% owner of the Company, revealed that GameStop was still grossly underperforming. He stated that the Company was in a “long-term secular decline,” as evidenced by the 85% decline in the stock price over the past five years.” He also revealed that GameStop was “one of the most shorted stocks in the entire market” because investors lacked confidence in the “current leadership team’s approach.”
When Ryan Cohen was offered a seat on the GameStop Board of Directors on January 11, 2021, the stock closed at $19.94. Cohen is most known for his success with Chewy, an online retailer of pet supplies purchased by PetSmart in 2017 for $3.35 billion in the largest e-commerce deal ever. As news spread of Cohen’s addition, excited investors began purchasing GameStop, which drove the stock price up and forced short-sellers to cover their positions (buy more stock) which pushed the stock price even higher. That was the first short squeeze. By the end of the day, January 13th, the stock price was $31.40.
But that wasn’t it. The second, massive, short squeeze was triggered by r/wallstreetbets, a four million-member (now closed) Reddit community. In this forum, investors were encouraged to drive up the stock price by buying GameStop’s shares (going long) and purchasing call options. The short squeeze increased GameStop’s stock price from $39.12 on January 20, 2021, to a high of nearly $483 per share on January 28, 2021, and causing large losses for short-sellers. On Friday, March 12, 2021, the still struggling retailer’s stock closed at $264.50.
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In closing
With the vaccine rollout, the light at the end of the tunnel appears close. The pandemic has been a year of learning. I hope we do not soon forget these powerful lessons—in the market and life.
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