The demise of meme stocks, day trading, and Robinhood (HOOD)
Excess money supply growth led to excess inflation which led to a rise in bond yields. That’s the secondary source of the current market volatility. The primary source is that the Fed has been too slow to react to all of the above and the market is punishing participants until the Fed catches up. That process is well underway. We are far closer to the end than the beginning of that process.
The 2020 COVID shutdown challenged all of us to do different things. As a people, we adopted new technologies, took up new hobbies, and spent A LOT of time with our “loved ones”. Personally, I took up baking and got a Peloton bike. One sort of offsets the other, but I now have some game in the kitchen and make a mean blueberry muffin (the key is to use frozen blueberries and nutmeg, but I digress). Last summer when both rates and volatility were low, the financial press was obsessed with meme stocks like AMC Entertainment and Gamestop. Cathy Woods’ ARKK ETF was another very popular theme meme to follow. Day trading was more popular than a 45-minute Peloton Classic Rock ride and trading platform Robinhood (HOOD) went public. HOOD was a new trading platform which would “set retail investors free”. Day trading was en vogue, the punch bowl was on the table, and the dancing was loud if not proud. That has now all permanently changed. Higher rates have revalued high flying, non-cash flow producing equities down to what they are: low dollar call options on an idea…not multi-billion dollar enterprises. Gamestop this week fired their CFO and announced massive layoffs. HOOD went public in July 2021 and today (just 12 months later) trades -75% lower from its IPO price.
Higher rates have eliminated speculation……and that is a very healthy thing. Volatility will persist until the Fed is caught up. But when that occurs – and it will occur – the market will move hard and fast in the other direction. Sentiment is already at historical lows, valuations have already been reset and when the market gets a whiff that the Fed is caught up on inflation the run towards risk assets will be a stampede. Tough to see now in the midst of all the current volatility but that is the backdrop and is what is setting up.
Richard Barrett
Chief Investment Officer
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