Meme stocks are rallying again – and that’s bad news for the market

A young man walks into a GameStop video game store.

A young man walks into a GameStop video game store in San Rafael, California.Justin Sullivan/Getty Images

  • Meme stocks have climbed higher in 2023 as part of a broader rally.

  • A fund that tracks retail trader favorites has jumped 60% year-to-date and recently hit a one-year high.

  • This is a sign that investors are choosing stocks based on “animal spirits”, which could be bad news for the market.

Meme stocks are back, and that should be a warning sign for investors that this year’s surprising rally may not last.

The asset class – popular with posters on Reddit’s Wall Street Bets investment forum, despite being made up of unprofitable or debt-ridden companies – has been making a comeback since the start of 2023.

Roundhill’s MEME ETF – a fund launched in 2021 to track some of the most speculative names in the market – hit a one-year high on Thursday and has jumped around 60% since the start of the year. The benchmark S&P 500 index is up 17% over the same period.

Meanwhile, much-maligned stocks like Carvana, Marathon Digital and Riot Platforms have all posted staggering gains of between 500% and 700% in 2023, while other Wall Street Bets favorites like GameStop and AMC Entertainment have also increased this. year.

But the resurgence of meme stocks should raise red flags for even the most optimistic strategists.

In January 2021, Wall Street Bets users crowded into GameStop, driving the retailer’s share price up 3,000% in the space of a month and fueling massive losses for the hedge funds trading it. had short-circuited.

Shares of AMC, BlackBerry and the now-delisted Bed Bath & Beyond also saw huge rallies in the same month.

In hindsight, this meme-stock craze marked the end of years of steady stock market gains — because just over a year later, the Federal Reserve began aggressively raising interest rates, shattering the “everything bubble” and plunging stocks into a bear market.

BTIG’s Jonathan Krinsky said last week that history could be about to repeat itself, pointing out that the benchmark S&P 500 index tends to fall when the performance gap between meme stocks and the goods sector consumption base widens to more than 10 percentage points.

(When its research note was released last Tuesday, MEME had jumped 10% in the span of three trading sessions, with SPDR’s Consumer Staples Select Sector Fund down 1.3% over the same period.)

Meanwhile, DataTrek Research co-founder Jessica Rabe said recent gains in meme stocks signal the return of “animal spirits”, using a term economist John Maynard Keynes coined in 1936 to point to when people start making financial decisions based on emotion, rather than logic.

Any rally based on FOMO, rather than fundamentals, is unlikely to last – and many major Wall Street banks are already warning that the S&P 500 is unlikely to continue racking up massive gains the rest of the year.

So maybe it’s time for investors to start worrying, because while meme stock gains are a boost for Reddit day traders, they tend to be bad news for everyone else.

Read the original article on Business Insider

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