Pitchforks and Stock Trading
The meteoric rise and fall of GameStop, driven by a group of online vigilantes, was more than a story of profit and loss. This “David and Goliath” story served as a reminder of structural inequalities and deep-seated mistrust of the financial system.
As we described in our 2021 Outlook, income inequality is both a local and global issue with a tangible impact on the economy and markets. Unless governments aggressively address income inequality, economic growth and interest rates are likely to be lower. The associated polarization of politics, and distrust of the financialized economy could increase volatility of returns and lead to financial fragility.
Can the democratization of finance save the day?
The opening, or democratization, of access to financial activities showed promise for addressing aspects of inequality of income and access. Access to free trading platforms promised that anyone could have access to financial markets, to invest in companies, and to build wealth. Open source information sharing via social media provided an approachable and understandable way to invest in the capital markets. Together, they created a community of momentum-based traders – akin to a decentralized hedge fund with no costs, no fees, and importantly no fiduciary responsibility.
While building financial wealth is an important step, the democratization of finance and free flow of information is unlikely to solve income inequality in and of itself. In order to address wealth gaps society will need multiple solutions, collaboration, and broad training and education.
How will the system adapt?
1. ESG integration and sustainable investing. Society’s attitudes toward an unfair system, toward social issues like inequality, are moving front and center to the decision-making process. Consumers are increasingly likely to consider social elements in their everyday purchases. Businesses practices like hiring and capital projects will have to follow suit in order to maintain market share, and investors – longer-term, active owners foremost among them – can play a substantial role in steering firms in the right direction.
2. More regulation could be around the corner – particularly higher scrutiny on tech, social media, and fintech. Events over the past several weeks have raised greater suspicion that Silicon Valley firms may be no more virtuous than their older, more established counterparts. This could lead to greater scrutiny of these companies, with implications for valuations of their equity and broader equity indices. Senator Elizabeth Warren, a leader in financial regulation over markets, has made calls for further oversight into market manipulation. In our view, a healthy stock market requires rules of the game. Investors should be aware that their trading platform or investment strategies may be at risk of change.
In addition, investors interested in gaining exposure to hedge fund-like strategies should consider more sustainable and diversified approaches for doing so. Hedge fund replication strategies might not “shoot for the moon,” but they do offer a low-cost way to potentially reduce correlation to traditional asset classes like equities and fixed income and provide alternative sources of risk/return to a portfolio
3. Capital gains tax and redistributive policy more likely. The trajectory for investment impacting policies, such as redistributive taxes, investment, and regulation, may be uncertain and variable with so much in flux. However, meme-stock madness re-centered attention on the ability of established market players to access investment opportunities that the average retail investor cannot. Regardless of your perspective on market structure and access, this development opens the door to capital gains tax increases this year (for implementation next year). As the Biden Administration seeks sources of funding for COVID relief and infrastructure reform, a growing desire to curb inequality means that capital gains taxes may be in play.
The opinions expressed are those of the Multi-Asset Solutions team, an investment team within New York Life Investment Management LLC and not necessarily those of other investment boutiques affiliated with New York Life Investments.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any particular issuer/security.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
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