t's a perfect storm for the stock market this year: geopolitical turmoil, high inflation, and higher interest rates in 2022.
And that's driven out many market newcomers, including "meme" stock investors, whose holdings soared and swooned from social media.
"This is a meme stock flush-out, especially for those who were leveraging up to buy everything from bitcoin to NFTs and tech stocks," said Paul Murray, founder of PTM Wealth Management in North Wales, referring to the popular cryptocurrency and non-fungible tokens, or digital data stored in a blockchain.
There are two broad shifts to blame for this month's sell-off.
First, the Federal Reserve's rate hikes mean that interest rates are higher and borrowing money is no longer cheap.
Second, overvalued technology names generally are selling off, speculative "meme" stocks, in particular, such as video game chain GameStop and AMC, the movie-theater chain. Starting in 2020 and into last year, the two companies' share prices went for a wild ride as anonymous chatroom investors, eager to gamble during the pandemic lockup, poured in money.
"The last 2 1/2 years have just put this effect on steroids," noted Spencer Jakab, a former equity analyst who edits the Wall Street Journal's "Heard on the Street" column and just penned the tome The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors, published in February.
Now, the pandemic-era newbies are feeling the pain of all their gains being wiped out.
"Markets are challenging for everyone, but there is plenty of anecdotal evidence that the greatest losses seem to be accruing to the newest investors," added Jakab, meaning those who began pouring in money in 2020.
Morgan Stanley in new research found that all the pandemic trading gains by retail investors were wiped out as of last Friday, May 6, even though broader stock market indices, which measure returns that accrue to a buy-and-hold investor, remain higher since January 2020.
Memes didn't age well
"The air is coming out of the bubble" for special-purpose acquisition companies (SPACS) and NFTs, Jakab said. "And disillusionment has set in among the Reddit crowd" who weren't traditional savers assessing the market through a prism of nest eggs shrinking and then recovering.
Meme investing overall has not aged well.
A chat-room-driven "meme" ETF, the VanEck Social Sentiment ETF (BUZZ) was launched in spring 2021 and tracked the 75 large-cap U.S. stocks that show the most positive investor sentiment based on social media, news articles, blog posts, and other alternative sources.
No surprise: BUZZ is down 42% year to date, more than the Nasdaq's 27% and S&P 500′s loss of 16%.
The Fed needs help
Where does that leave the boring buy-and-hold crowd? Professional investors such as Hank Smith, head of investment strategy at Haverford Trust, were already pivoting, raising cash and cutting stock exposure, as the Fed hiked interest rates to battle inflation.
In order for the Fed's rate hikes to tame 40-year-high inflation, "the central bank needs an assist," Smith said.
"COVID needs to end, the [Russia-Ukraine] war needs to end, and they need help" from Congress, he said. That could take the form of subsidies for green energy, passage of a Build Back Better plan, or fewer regulatory burdens.
For Haverford clients, "this market has been very helpful for our strategy of sticking with large-cap dividend-paying stocks," he said. While the firm missed much of the run-up in energy, he sees bargains among companies such as BlackRock, JPMorgan and Nike.
As in 2000, "we are seeing a tech bear market rout. But the difference this time is there's a lot more earnings than 20 years ago. Elevated valuations today don't even compare when Cisco sold for 200 times earnings" about 2000.
It's no time to panic.
"We fully expect the stock and bond markets to react whenever the Fed makes any rate-hike pronouncements. But we have seen time and again that the markets' initial responses do not derail long-term returns," wrote Adviser Investments in a note to clients. Over a 24-month period following the beginning of a multi-year cycle of higher interest rates, stocks on average generated positive returns, the firm found.
Mirror of tech rout in 2000
Market volatility is likely to persist as Fed rate hikes continue, said Jason Pride, chief investment officer for private wealth with Glenmede Trust in Philadelphia.
"What's happening is a mirror image of the period 1999 to 2000. We had extreme valuation excess in a pocket of the market, and that's now going through a major adjustment," Pride said.
If you can wait out the storm, Tower Advisors said, "earnings are holding up, but the path forward is uncertain. If you are nervous and don't see clear skies ahead, take some money off the table. Some. Maybe 10% of your equity exposure. Then stand back, take a deep breath, and relax. It is highly unlikely that our economy is going to fall apart in the next three months," the firm said.
By the end of July, after two more Fed Funds rate increases, Tower said, it will be time to reassess. In the meantime, Vanguard in a May 4 webinar quarterly presentation said returns on the traditional 60-40 portfolio — 60% stocks and 40% bonds — are expected to be roughly half of the 9% annual profit investors realized over the last decade.
