Trust Issues
Alison Cooke Mintzer (photo by Chris Ramirez)
Who were the biggest financial newsmakers of late January? GameStop stock, social news aggregator Reddit and hedge funds—quite an unlikely trio. It was a bizarre, out-of-nowhere news item: Struggling retailer GameStop, which had recently announced more store closures, suddenly becomes the center of a Wall Street trading frenzy, its stock going through the roof after amateur traders in a Reddit forum invested in the stock to drive up the price. Their goal: to force hedge funds that had shorted the company’s shares to buy GameStop stock to prevent more losses. As one of the Reddit forum members said in an NBC interview, “They made a bet, and we called their bluff.”
The story was everywhere, with a David-and-Goliath-type symbolism—the little guy taking on the hedge funds that had bet against the company. Platforms started—and then stopped—the trading of certain stocks; members of Congress called for hearings; the Securities and Exchange Commission (SEC) noted it was “closely monitoring” the situation. News outlets ran stories about the markets, explaining nuances of shorts and of institutional vs. “armchair” investors.
It was even featured in a Saturday Night Live (SNL) skit called “What Still Works?” Kate McKinnon was interviewing the new majority shareholder of GameStop (played by Pete Davidson), examining how crazy the situation was.
Kate McKinnon: “Let’s take a look at the stock market. It usually works, right? That’s where people invest all their retirement money, so it should probably work. …” (to Davidson) “So normally a stock price reflects a company’s value, right? … Two weeks ago, GameStop was valued at $17 a share, and then it went to $413 a share. Would you say that reflects the kind of business GameStop stores have been doing in the past two weeks?”
Davidson’s character acknowledged that the company was not in fact doing well, agreeing that the price should have been going down, but instead went up.
McKinnon then continued, “So now it seems like … ”
“The entire system is a joke?” he said.
“Exactly,” McKinnon replied. “So, the stock market no longer works.”
While the skit was amusing, this whole GameStop drama draws attention to many issues with which we in the retirement industry continue to grapple.
Since last spring, we’ve seen, time and again, economic indicators at odds. There’s been a rising stock market despite hundreds of thousands of deaths from a pandemic and unemployment figures that would have seemed unfathomable a year ago. People have questioned why the market can just dismiss the hardships of so many Americans. A chart showing the increase in food insecurity and food bank demand overlaid with the stock market climbing made the rounds, as an example of the kind of disconnect Wall Street has from the rest of America and as a possible foreshadowing of a K-shaped recovery that would widen inequality.
I spoke to some advisers about this, many of whom observed that it was out of their wheelhouse but that this populist movement—“Occupy Wall Street,” as one adviser called it—should be paid attention to.
As McKinnon noted in the SNL skit, the stock market “is where people invest all their retirement money,” but the individual retirement investor is a tiny owner compared with hedge funds and other market makers. Average Americans must be able to trust that the “stock market works,” that they can reap benefits from investing, otherwise, what will become of savings plans that rely on investments? Any push for expanding access to plans and encouraging participants to increase saving for retirement will be for naught.