Wall Street investors expect meme stock mania to stick around

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Wall Street says the meme stock is here to stay.

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Born of lockdown boredom, no-fee brokers and social-media chatrooms, the phenomenon drew in a new generation of traders, who fuelled massive rallies by banding together to pump up the stock prices of companies Wall Street was betting against.

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It had all the elements of a flash-in-the-pan trend, especially with the speculative excesses giving way to a bear-market beating. Yet Wall Street professionals and individual investors think it will become a permanent part of the market landscape: Nearly two-thirds of the 522 respondents in the latest MLIV Pulse survey expect some version of the meme stock mania to stick around.

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The meme movement has added volatility into corners of a market already contending with rising interest rates, recession risks and a steep drop from the record highs. That was on display this month with Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc., two meme favourites, both surging, only to give back the gains just as quickly.

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“We see community aspects within meme stocks, so as long as investors create community and access, they’ll find their way into meme stocks,” said Callie Cox, an investment analyst at eToro. “Meme stocks are just another way that retail investors are getting engaged with the market.”

Meme stocks are just another way that retail investors are getting engaged with the market

Callie Cox

Speculating in meme stocks has been painful this year. Even the coordinated efforts have been no match for a rout that’s battered individual-investor picks such as high-growth technology stocks and cryptocurrencies. A basket of 37 retail-trader favourites tracked by Bloomberg is down nearly 40 per cent in the past year.

The gauge, which includes AMC, GameStop Corp. and BlackBerry Ltd., looks set for another loss Monday with all three stocks down at least three per cent in pre-session trading. Stocks in the United States are poised for further declines after Jerome Powell signalled the U.S. Federal Reserve is willing to keep tightening policy, even if it’s at the expense of an economic downturn.

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Wall Street professionals are split on whether the market won’t hit a bottom until individual investors withdraw their support by becoming net sellers of stocks. The group has recently pushed US$1.2 billion per day into U.S.-listed securities, according to Vanda Research Ltd., below its expectations for a US$1.3-billion to US$1.4-billion influx. With the S&P 500 off its mid-month highs, that signals a potentially diminished appetite for buying such dips.

The retail trading crowd faces “a crucial inflection point as summer draws to a close,” according to Vanda analysts.

The MLIV Pulse survey found that while the meme-stock phenomenon is likely to stick around, 69 per cent said it’s unlikely to see the trading volumes it did during its January 2021 height. Nor are such stocks seen as a good bet for the remainder of the year.

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When asked whether cryptocurrencies, meme stocks or so-called blank cheque companies known as SPACs would provide the best value over the next six months, 51 per cent of respondents chose crypto and 32 per cent SPACs. Only 17 per cent favoured meme stocks.

Nevertheless, the run-ups in some meme stocks have provided a financial lifeline to certain companies, allowing them to raise funds by selling shares or tapping lines of credit.

Bed Bath & Beyond is in talks with Sixth Street Partners for a new line of credit, Bloomberg reported, citing people with knowledge of the private discussions. The stock advanced to US$23 from US$4.50 in a rally that ended on Aug. 17, but since then, the shares have lost more than half their value. The retailer will host a conference call on Wednesday to address plans to drive growth and strengthen its balance sheet.

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“Memes come and go quickly, same thing goes with these prices,” Jaime Rogozinski, founder of the popular online stock-market chat forum WallStreetBets, told Bloomberg TV.

Memes come and go quickly, same thing goes with these prices

Jaime Rogozinski

While the presence of meme stocks is something investors will keep an eye on, they were mixed on whether its volatility poses a risk to the broader market. Fifty-seven percent said it doesn’t, with 43 per cent saying the opposite.

“Meme-stock trading won’t have enough money backing long substantial moves that dictate longer-term trends, but become more of a pump and dump trade,” said Ed Moya, senior market analyst at Oanda Corp.

In a gauge of broader market sentiment, more than half of the respondents said they expect U.S. Treasuries to have a better volatility-adjusted return over the next month than U.S. stocks. The U.S. two-year yield jumped to the highest level since November 2007 in Monday morning Asia trading, after Fed chair Jerome Powell said at Jackson Hole that a restrictive stance was likely to remain in place “for some time,’’ and “the historical record cautions strongly against prematurely loosening policy.’’

Bloomberg.com