The COVID-19 pandemic was officially declared a thing of the past by U.S. President Joe Biden. Although not everyone agrees with his statement, the previously feared virus doesn’t affect people’s daily lives anymore in large parts of the world. However, what about stock markets? Are trends and fads of the COVID-19 era as bygone and forgotten as lockdowns and government checks? It’s likely that the trends witnessed during the meme mania will continue but on a much smaller scale.
Money for Nothing, Checks for Free
Early into the pandemic, the U.S. government issued federal stimulus checks in a bid to support consumers and kickstart the economy, or at least the parts of it that weren’t closed for the fear of infection. Unexpectedly, that money helped propel one of the most bizarre stock market trends – the “investment” in Meme stocks.
“Memes” are pictures or videos that rapidly gain viral online popularity as web users share them instantly with their connections. Well, now we know that capital markets can have their own Memes – stocks that have gone viral thanks to their popularity on social media.
The rise of Meme trading was made possible by online trading platforms like Robinhood (NASDAQ:HOOD), itself a Meme stock. Their zero-minimum, fee-free, and fractional share buying plans make trading easy (too easy, according to some regulators). Combine that with millions of young people locked up at home, passing time online; add to it money for free from the government – and you’ve got a recipe for a retail speculation tide sweeping the stock markets.
According to estimates, between $140 and $300 billion of the stimulus money has found its way into the stock markets; there’s no way to measure the exact numbers. FINRA trading information shows that retail trading spiked shortly after the government released stimulus checks, and stocks with high retail trading volumes climbed the most.
Meme Trades: The Beginning
It all started on Reddit, in the r/WallStreetBets community, but spread like wildfire to Twitter, Facebook, and even TikTok. The social media communities built up weird narratives, ranging from your regular “short interest” theory to the outright madness of conspiracy theories, kindling cult-like hype around some companies’ shares.
During the past two years, we’ve watched in awe as the WSB apes (no insult intended, that’s what they call themselves) flow into a stock in a coordinated manner, taking its price up by hundreds of percent.
The first Meme trade that the whole world noticed was GameStop (NYSE:GME), a brick-and-mortar video game retailer, that somehow remained alive in the Era of the Web, although barely so. GME shares were trading for about $1 when a prominent WSB persona drew the users’ attention to the company, promising an imminent short squeeze due to a huge short interest held by hedge funds.
As WSB & Co obliged and sent their money to work, the short squeeze arrived in earnest, with GME surging around 1,700% within three weeks of January 2021. The main victors of the squeeze were average Joes while the main victims were hedge funds, some of which were forced to shut down due to heavy losses. That gave a start to a narrative of Meme traders fighting the Big Money, defeating Wall Street, and revenging Main Street.
Too bad for Main Streeters who bought into the hype. As we know – statistically – most retail investors jump onto a trend near its top; that is why in any given year, 70% to 97% of retail traders lose money in the stock market. Although many of the Meme stocks now trade higher than before, well, becoming Memes – it only helps the Redditors who jumped into them early in the game, while most retail investors who bought these stocks on hype are now saddled with heavy losses.
Following the GME incident, the frenzy around Meme stocks grew, and the bored apes went on to identify other heavily shorted stocks. Other Memes emerged, with varying degrees of success but with a huge amount of noise. The investing world watched in awe as stocks of unprofitable, unknown, or outdated companies like AMC Entertainment Holdings (NYSE:AMC), Blackberry Limited (NYSE:BB), and Clover Health (NASDAQ:CLOV), surged hundreds of percent within days.
Robinhood itself had turned from just a popular trading platform into a wild Meme stock. Thankfully, Reddit itself is a private company – otherwise, the crash that always follows the Meme surge could have wiped the WSB apes’ own platform.
Trading for Fun, Not for Profit
2021 was a “Feast in Time of Plague” in the stock markets. In 2022, the plague is over; has the feast ended, too? The mood has shifted dramatically in 2022, with economic and geopolitical issues taking the main stage. The lockdowns and the federal checks are long forgotten; meanwhile, the Fed is on a mission to defeat surging inflation even if it means hard-landing the economy.
People aren’t sitting at home bored with money in hand – the opposite is true, as high inflation is eating into their incomes while economic uncertainty weighs heavily over their nearest future. If you have to use your hard-earned money and you aren’t sure you’ll still have a job tomorrow – would you still buy another Meme stock?
What’s often not easy to understand for the grown-ups among us is that the main drivers of the Meme-mania aren’t free money, lockdown boredom, or fight against evil hedge funds for the common good. These are merely explanations; what really drove these crazy trades was that the WSB crowd was having fun. That fun is still there to have (even if there are less financial means for it).
Meme stock trading is essentially a social process; as long as there are people gathering around some idea, it will be repeated again and again. Every week or so, there’s some new Meme stock with some new set of retail cult around it – in addition to the Memes we’ve already got used to, like AMC or Bed Bath & Beyond (NASDAQ:BBBY).
The latter saw a flare-up of its Meme status as recently as in August 2022 when it jumped more than 500% within three weeks. We are talking about a cash-burning retailer with falling sales, a troubled business model, and negative prospects; but the fundamentals don’t matter when the Meme-game is on.
The best proof of this is the spike of almost 600% in a week in shares of Revlon (NYSE:REV) after the company filed for bankruptcy in mid-June. Revlon, a heavily indebted company with declining sales that had been struggling for years to stay relevant, was touted on r/WallStreetBets as “the next Hertz” – but Revlon’s high level of indebtedness means there would be no money left for the shareholders after repaying its lenders.
Now that there’s much less money sloshing around the market’s shores, the Meme-craze has deflated to much smaller proportions and to shorter timelines. It is now also much less noticeable for people who are not on Reddit and don’t hold short positions in any of the many Meme darlings.
Still, the Meme traders en masse continue to lose money, as seen in oh so many posts on r/WallStreetBets – but continue to hope. It looks like in some form or another, Meme stock mania will stick around. It won’t have enough money to back serious moves in the market; it looks like the Meme trades will become another type of pump and dump trade.
The Big Bears are Out to Play
The run-up in Meme stocks provided some of them with life support, allowing troubled companies (like AMC or BBBY) to raise funds by selling shares or tapping lines of credit. These companies are clearly the biggest winners of the Meme trades, while the traders themselves are nursing painful losses.
Speculating in Meme stocks has been excruciating this year. Reddit’s coordinated efforts have been no match for a rout in the markets, hitting all stocks and all but destroying the most speculative names. The Meme-stocks ETFs (there are three of them!) have substantially underperformed the general indices. Yes, S&P 500 and Nasdaq Composite are down 23% and 31% this year, but Meme traders have it much worse. The Roundhill Meme ETF (MEME) which holds 26 social-media favorites, is down almost 60% year-to-date.
Most of the stocks swept up in the 2021 trading frenzy now stand anywhere between 70% to 95% below their recent highs. After all, their rise wasn’t prompted by strong fundamentals, but by their entertainment value as speculative plays, much like casino games.
If that’s the way the traders see their Meme stocks, then it’s clear why many of them continue to play the game: gambling is a fun pastime if you’re prepared to pay for it. Sooner or later, stock prices catch up with their fair value, which is based on their financials, business model, and management policy, and not on hype.