“SPACS Are the Stock Market’s Hottest Trend.”
“SPAC Selloff Bruises Individual Investors.”
Those headlines appeared in the Wall Street Journal seven weeks apart.
SPAC stocks were spectacular, until they weren’t. SPAC is an acronym for special-purpose acquisition companies. They also are referred to blank check companies. True to their name, it tells an investor both nothing and everything about what they are.
These public firms start as nothing more than bank accounts. The cash they contain is used to buy a private company, thereby taking that company public but skipping the traditional, and costly, initial public offering route. Online gambling site DraftKings, space travel firm Virgin Galactic and electric semi truck maker Nikola are some of the companies that have been bought by SPACs, allowing individual investors to own and trade shares.
In the past three months, SPACs have stumbled hard. Exchange traded funds concentrating on SPACs have fallen 30 percent. Virgin Galactic has crashed, falling 40 percent.
And then there is the carnage in cryptocurrencies. Bitcoin, Ethereum and Dogecoin plummeted more than 20 percent each in the past week. These virtual currencies may still have real gains for the year, but the whipsaw nature of the May sell-off is a brutal reminder to the crypto faithful that markets can move in more than one direction — and at lightning-fast speeds.
What is important for long-term investors in the week ahead is how the sharp selloffs in these once-hot markets affects the mainstream markets. Will any fear generated by the fast money that’s been lost in SPACs and cryptocurrencies spill over into the wider market? When some of the most speculative corners of the markets crash, can the damage stay contained?
Ultra-speculative assets like blank-check companies and virtual currencies play important roles in the capital markets. They can provide tremendous rewards for those willing to accept tremendous risk. Now, more traditional investors will be on guard for signs if those risks are infecting other markets.
