Meme stocks are spinning again, and that’s a bad sign for the stock market, according to an investment bank. Maybe so, but if I nitpick, the recent action doesn’t seem particularly memorable. I would characterize it more as a tactical trash rebound.
“The return of memes is a red flag,” reads the title of a July 11 technical strategy note from BTIG. He pointed out that an index of meme stocks rose 10% in three days, compared to a decline of nearly 2% for consumer staples. Over the past 18 months, as the three-day gap between the two has widened, the
S&P500
lost an average of 1.5% over the next 20 days.
Such a small drop might be more attractive to day traders than to long-term savers. But the note has something to take away for everyone: a broadening of this year’s rally is “encouraging,” but a rise in low-quality stocks “is often the end of the ride.”
The scope of the market is a hot topic. The S&P 500 index is up 17% since the start of the year. Seven stocks combined with a market value of $11 trillion contributed 73% of the index’s gains in the first half, according to BofA Securities. These are
Apple
(symbol: AAPL),
Microsoft
(MSFT),
Alphabet
(GOOGL),
Amazon.co.uk
(AMZN),
Metaplatforms
(META),
Nvidia
(NVDA), and
You’re here
(TSLA).
The Magnificent Seven, as some investors call these stocks, collectively trade at 40 times earnings and skew valuations higher for index investors. The S&P 500 as a whole is worth 20 times earnings. The index minus the Magnificent Seven – the Frugal 493? – is trading at a more reasonable rate of 15 times earnings.
There is more to worry about than valuations. Second-quarter financial reports are just ahead, and consensus is calling for a 9% decline in S&P 500 earnings from a year ago, on flat revenue and shrinking margins. Meanwhile, data from last week showed inflation fell to 3% in June from 4% in May, suggesting the Federal Reserve may be close to the end of its interest rate hike cycle. . But
Global Apollo Management
It is
Chief Economist Torsten Sløk points out that higher rates have a lagged effect on growth and that recent hikes should weigh more heavily in about a year.
So if, on top of all that, the stock market is now sending clowns, it might be time to take some profit. But is this stock market rally real?
A social media meme is an image, video, or piece of text that spreads virally with slight variations, often in an attempt at humor. The Grumpy Cat meme, for example, consists of photos of grumpy felines with user-added captions, such as “I purred once. That was horrible” or “What doesn’t kill you…j hope he tries again”.
During the pandemic, traders armed with stimulus money,
Robin Hood
accounts and access to Reddit discussion forums began to drive up the prices of certain assets that seemed to be selected for ironic purposes – for example, the wrong company named Zoom, a parody cryptocurrency and a holding company linked to the old Blockbuster video channel. Investors started calling these actions punchline trades memes, and the main ones were
GameStop
(GME) and
AMC Entertainment Holdings
(AMC).
To be clear, there’s nothing comical about a company making the most of selling disc-based video games in mall stores at a time when discs, stores and malls are in decline. But there’s something mischievous about traders sending shares of this company 20 times more in value in about two weeks, blowing up short sellers in the process.
It was early 2021, and before the end of the year, Roundhill Investments, which sells exchange-traded funds with niche themes, had launched the
Roundhill Meme
ETF (SAME). It tracks an index that automatically selects 25 stocks. Since there’s no way to filter out the irony, the index uses two other factors to gauge the potential for short cuts: a flurry of social media mentions and heavy short selling as a percentage of available shares.
The fund, which has performed poorly since inception with meager assets, is what BTIG has used to gauge recent gains in its meme return rating. GameStop and AMC are holdings, but the initial irony seems outdated, and the stocks weren’t big winners when the fund was running. Other holdings are odd adjustments. Do
Delta Airlines
(DAL), one of the strongest legacy carriers and a solid cash generator, do you know it’s a meme stock? How is it ironic
Carnival
(CCL), the cruise line?
Walgreens Boot Alliance
(WBA) is decidedly unfunny, even by drug chain standards. His actions are asleep too.
I screened the members of the MEME index over the three days BTIG looked at and found that their gains were mainly due to the fall of momentum stocks with negative earnings last year, not what I would call memes. There is a car salesman
carvana
(CVNA); bitcoin miner
Riot platforms
(RIOT); lending platform based on artificial intelligence
Assets received
(UPST); two concerns of electric vehicles,
Rivian Automotive
(RIVN) and
Lucid Group
(LCID); and two financial service providers to the whole crypto and momentum,
Coinbase Global
(CURRENCY) and
Robinhood Markets
(HOOD).
Next, I sifted through all of the US stocks for top gainers during those same days, and reviewed the list for anything remotely fun. Real estate agent
red fin
(RDFN) and banner
Fubo TV
(FUBO), each up around 30%, are dynamic declining stocks with high short selling, but no ironic twist. Not far behind them is
WD-40
(WDFC), a successful lubricant company whose sales have been growing, and that’s about as serious as it gets.
Verdict: no gathering of memes, just investors grabbing shoddy products. It is not clear if this signals any problems ahead for the overall market.
Barry Gill, Head of Investments at
UBS Asset Management
,
agrees that the recent rise in interest rates will intensify. “It’s more of a 2024 event than a 2023 event,” he says. Investors probably have too much money now in US growth stocks and long, safe bonds, and they could settle for a little more cash. “It’s been a long time since you’ve had rates above five percent on money market funds,” says Gill. Even Grumpy Cat would approve.
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.