Main content

Confused by recent stock market fluctuations?

|
5
MIN

Wall Street’s recent frenetic news, fueled by the online trading platform Robinhood, has grabbed mass public attention.

Robinhood, a commission-free investing app, has come under intense scrutiny and backlash because retail traders — in online forums such as Reddit’s r/WallStreetBets — took GameStop stock on an extraordinary roller-coaster ride.

Many media accounts depicted the stock saga as pitting small day-to-day investors on social media challenging big hedge fund institutions.

“That’s a nice narrative. That's not the whole story,” said Matt Sheridan, senior lecturer at The Ohio State University’s Fisher College of Business.

Sheridan shed some light on recent Wall Street developments and reasons that there is hope that the economy might rebound with COVID-19 vaccinations rolling out under a new presidential administration.

Did Robinhood manipulate the stock market during the recent GameStop trading frenzy?

For manipulation, there’s a burden of proof, where you could say that somebody was spreading false information to help drive up the price to try to get other investors to pile on.

There were definitely a lot of retail investors on WallStreetBets that don't know the ins and outs of Wall Street and looked at it like gambling. And that's OK. If somebody is going in and putting money down on different stocks, looking at it like they're at the craps table at the casino, and they're comfortable if they were to lose everything well, that's the game you're playing.

The other part of this is people thinking that they're investing when they're actually gambling. That becomes somewhat dangerous because it's a sophisticated game with a lot of money behind a lot of financial market data that retail investors do not have access to. The professionals in this arena are highly educated, highly competitive. There is a scoreboard, and it’s called profit and loss.

Robinhood’s move to restrict trades after stock prices soared was widely criticized by media and politicians on both sides of the aisle. Why was that move controversial?

There shouldn't be anything controversial about what they did. It was a misunderstanding of how the plumbing of the financial markets work.

By all appearances, Robinhood needed to raise money from outside investors to ensure they could stay in business. They got the equivalent of a margin call: They had to put up more collateral to the clearinghouse to settle trades.

In the moment, politicians were looking at their constituency getting upset and feeling that Main Street was losing out to Wall Street. It’s an easy, popular political talking point. A lot of the anger and animosity goes back to the financial crisis in 2008.

The critics have to understand that Robinhood is a brokerage firm, a for-profit company. They’re not a charity. If you’re not paying explicit commissions to them, they’re making money in other ways. It’s the clients that are the product.

People perceived the product to be free, and it really isn’t. That caused so many people to not understand why Robinhood did that. And Robinhood did a terrible job explaining this to their clients.

Why is the stock market up even though the economy is down?

The stock market is not the economy. No matter where we are, in any time frame, that should be understood.

Today we have one of the most dramatic disconnects between what is going on in the economy and what is going on on the stock market. In the economy, we have high unemployment. The market is hitting all-time highs. Valuations are very high. But it's also a bifurcated market.

This (COVID-19) pandemic has made white-collar workers much more successful than blue-collar workers. If you're able to work from home, you've succeeded better. Men have done a lot better than women because childcare centers and schools have been shut down. That burden has been more heavily placed on women. There have been some people who have weathered this storm really well. It’s not evenly split across socially economic areas.

But the stock market is forward looking.

What’s your forecast for the economy?

We are a consumer-driven economy, and the data shows that savings rates are up. There's a hope that when we get out of this pandemic, and life returns to some semblance of normalcy, that those increased savings are going to translate into a huge boom of consumer spending and retail sales.

There is a lot of pent-up demand to travel, to go to restaurants, experience nightlife again. But until we get to that critical threshold of herd immunity, it's going to be hard to restore the whole economy. There's a big part of our population that will not go out and spend the way that they did if they feel unsafe. But once we get to that point, hopefully, the economy will start taking off.

The stock market tends to take the stairs on the way up, but it takes the elevator on the way down.

Matt Sheridan, Senior lecturer, The Ohio State University Fisher College of Business
Should we have the same optimism for the stock market?

Nobody has a crystal ball or can predict with any true accuracy where the stock market is going to be at the end of the year or the year after that. Statistics and long-term history show that most years the stock market goes up, but it doesn't go up every year. There are some difficult pull downs.

There shouldn't be this overwhelming optimism that we're going to have above-average returns over the next few years. When we look at these valuations, can we go up more? Absolutely. But could we have a big pullback — a correction or a crash? Sure. That’s the way the stock market works. It goes up and down.

A lot of retail investors don't calculate their emotions and feelings toward the market. The stock market tends to take the stairs on the way up, but it takes the elevator on the way down.

Investing should be a long-term game. One of my favorite quotes about the market in the United States is that you can still get rich quick just not on purpose.