In addition to giving a brief portfolio update, this month’s video market update explains what meme stocks are and the phenomenon around them.
June Stock Market Update Transcript
Hi, everybody. This is Derek, the investment analyst here at Financial Services Advisory, with your June 2021 market update.
During the last several months, a strange phenomenon has developed in the stock market wherein a handful of struggling publicly traded companies has seen their stock prices explode much higher. Perhaps you have heard of the bizarre trading activities surrounding some of these names, including GameStop, AMC Entertainment, and Blackberry, to name just a few. So, what is going on with these so-called meme stocks, and how does it affect ordinary investors and the overall stock market?
First, a definition is an order. A meme stock is a stock that has seen increased trading activity, not due to a change in underlying business conditions, but because of its popularity on social media, such as Twitter or Reddit’s popular WallStreetBets community. With over 10 million subscribers, the WallStreetBets forum is hosted by the social media website reddit.com and allows users to discuss trading ideas, share screenshots of their gains – and often substantial losses, and post generally offensive material poking fun at both themselves and the companies whose stock they trade. When many of these internet traders flock to the same stock, thereby drastically increasing trading activity, a meme stock is born.
With the arrival of the COVID-19 pandemic lockdowns, new speculators and gamblers were driven to the markets by way of these online forums as a combination of stimulus checks, boredom, zero-commission trading at major brokerages, and an absence of sports games to bet on fostered an environment ripe for stock speculation. The first target of these speculators were the stocks of companies that had declined sharply due to the pandemic, such as airlines, cruise operators, and even bankrupt rental car agency Hertz. It is not uncommon for risk-tolerant investors to step in during a sell-off and place wagers that everything will ultimately be okay. If they are right, the stocks that they acquire will return to their pre-crisis levels, netting the investors huge gains.
Many of these internet speculators saw their risky trades pay off as the Federal Reserve sparked a massive rally in stocks in the spring after announcing that they would do “whatever it takes to keep the economy from collapsing.” Emboldened by their initial gains on beaten-up leisure companies, these traders spent much of the remaining part of 2020 focused on technology and growth names, such as Tesla. By the new year, however, this speculative behavior took a strange turn as these internet traders banded together to send shares of video game store operator GameStop from $20 per share to as high as $400 per share.
Most recently, we’ve seen shares of movie theater chain AMC Entertainment climb from $10 per share to over $70 per share, far surpassing its pre-pandemic valuation. The explosive rally in AMC shares has been so disconnected from the reality of AMC’s underlying business conditions that AMC itself declared its own stock to be overvalued and announced the issuance of millions of new shares in an effort to shore up its balance sheet. In a plot twist worthy of the big screen, these traders may have actually helped save the struggling movie theater chain by allowing them to raise capital when they need it most.
So why did these traders decide to send the shares of these struggling companies into the stratosphere? This community of internet traders appears to enjoy proving seasoned and market veterans wrong, as was the motivation for targeting GameStop, where many supposedly sophisticated hedge funds that had sizable bets placed against the stock took large losses amid the rally. Furthering the rally, though, are the same underlying motivations of greed and a fear of missing out that have been present throughout market history, whether it was the Dutch tulip mania bubble in 1636 or the dot-com technology stock bubble of just 20 years ago.
What makes this moment in market history different than previous ones is the use of internet and the accessibility of digital communities. It has never been easier to join a movement and feel like part of the cause regardless of its merit. Internet traders assume that someone else online made a big profit trading one of these stocks, and then they also think that they can replicate it, all while feeling a sense of comradery as though they’re part of a team crusading against what they deem to be an arrogant class, elitist professional investors. While we can’t know with certainty how this speculative mania will end, if it’s anything like past bubbles, the result may leave a lot of people poorer than when they started.
What does this all mean for clients of FSA, though? There have been times in which some of the funds we have owned for client portfolios contained at least one of the stocks that have been targeted by these internet traders. These funds may own many other stocks in addition to these meme stocks, so the likelihood of any one single stock affecting client portfolios in a noticeable way is low. We monitor each fund closely to ensure that the fund is performing as expected. For now, this meme stock phenomenon is just an odd and interesting side show. As always, the FSA Safety Nets® are applied to each fund we hold which will shift money out of any fund that falls below the exit price regardless of the underlying reasons for a sell-off.
Now for a quick portfolio update. In May markets posted mixed results with the S&P 500 gaining 0.7%, while the NASDAQ lost 1.2%. We shifted some of our holdings from growth-oriented funds into value-oriented funds. We are entering the summer months, though, which has traditionally been a seasonally weak part of the year for markets. If markets do sell off this summer, we will follow our exit process until the uptrend resumes. For now, we’re content to let the portfolios ride the wave higher.
For your June 2021 market update, this has been Derek, the investment analyst here at FSA. Thank you for watching. And of course, do not hesitate to reach out with any questions or comments at email@example.com.