Market Update
Earnings season is winding down and over all, it was a pretty standard affair. Some 3/4ths of S&P 500 companies reported financial results that beat the estimates they themselves gave to Wall Street as their targets. This is typical. It was also reassuring to investors who were expecting the worst. However, as indicated by this chart, only 32% of companies have signaled that they expect higher earnings next quarter, the lowest amount in years.
The recent rally in stocks, especially by some of the most beaten down names, extended for the fourth week in a row. Amongst the good news are some data points that are truly good. Consumer sentiment, or the totally subjective measurement of how rosy people feel about their future and their willingness to spend, increased in July. Inflation eased in July, down from 9% to 8.5% annualized. Prices on imported goods fell over 1% last month. In the “bad news is good news” category, the producer price index fell last month. This is the month-over-month change that U.S. producers receive for their goods. In another, less worrisome world, this would never be cheered. Yet investors are betting that worsening economic conditions mean the Federal Reserve will not raise rates by as much in the remaining three 2022 meetings. It is a gamble for sure. Inflation at 8.5% annualized is still eye-popping compared to historical rates and out of the range of normal or acceptable. The current Fed Funds rate of 2.5%, is completely normal and even on the low side. But a slower increase in the rate may prevent a larger downturn in the economy. The bond market is concurring with optimistic stock investors. Rates on the benchmark 10-year U.S. Treasury notes have been trading below 3% in the last few weeks. Some bond traders suspect that the Fed may even cut rates in 2023.
That might be sweet relief to homebuyers, who are dealing with the double whammy of higher interest rates and home prices that are over 40% higher than they were two years ago. Existing home sales have declined each of the last five months. Companies like Zillow say that homeowners, the sellers, will not drop prices in any “meaningful” way, which means that the market could experience a freeze unless, or until, rates drop. Rates are a bit lower already from their high in June. But affordability will be an issue until either sellers or buyers blink.
The Return of the Memes
If a meme is viral picture or video that captures the feelings of its audience about a certain event, a meme stock’s price captures the emotional value of a company, not the financial value. The investors become completely divorced from any fundamentals such as the underlying company’s revenues, debt and operating expenses. Price action is spurred on by retail investors who whip up buyers via social media, and Wall Street traders who short sell and take the other side of the trade.
It was an epic battle in 2021 when work-from-home traders took on Wall Street on two stocks in particular: movie theater operator AMC and video game retailer GameStop. As was noted at the time, their stock prices flew to the moon and back. Eventually the enthusiasm petered out with the awareness of the coming Federal Reserve tightening and increased volatility across all asset classes.
The exchanged-traded fund, ticker MEME, was late to the party. Launched last December, its managers screen social-media sites and watch short interest metrics to hone their list of 25 stocks. The fund’s price fell in almost a straight line from December until mid-June.
It was in June that we now can see that a shift was taking place across all market classes and indices in the stock market. It was most pronounced by gains in the lowest of quality stocks. And then the memes staged a comeback, their fans fired up by Wall Street institutional investors bragging about their new short positions.
Take Bed Bath & Beyond. Trading near $54 in January 2021, it fell below $5 this spring, ultimately unable to escape its troubled business model and finances. But it is up 19% just today, up 167% since late July. Thank Reddit’s popular WallStreetBets forum, which caters to enthusiastic retail investors; it is a hotbed of speculative chatter about the company. One user claimed to have taken out a $27,000 loan to go “all in” on BBBY. Joining the party, AMC has nearly doubled since late July, riding the same wave. The MEME fund is up 25% since July 25th and so is GameStop. Thus, the memes are back.
And when will it stop? Perhaps sooner rather than later. If retail investors must take out a $27,000 loan to irritate Wall Street, it seems unlikely that Wall Street can lose in the long run. Per astute professional investor Jared Dillian, the little guys could win if they commit to “conservatively investing for the long term”. That sounds more like financial advisor's mantra than anything else. That would also take a massive shift in outlook and perspective, and be a lot less fun for them, as they seem to see the stock market more like Vegas than a stable marketplace. Americans struggle with patience, investors even more so.
The (un)Fortunate Brave
If the markets have been challenging for traditional investors this year, it has been exponentially difficult for those holding most any form of crypto-currency. The most popular economic arguments for holding the alternative currency have not held true. The digital currencies have not been a reliable hedge against inflation; they have fallen as inflation has surged. Nor are they like gold, retaining value without risk of depreciation. They are not all that transparent and safe; despite the public accounting for all currency holders via the blockchain, hackers are still on every corner. (So far just this year, over one billion in crypto has been stolen.)
Celebrities, many of whom will not miss an opportunity to use their personal platform for a worthy, self-enriching cause, have been enthusiastic about the industry. They have pumped the crypto coins, the exchanges (think banks) that offer them, and NFTs, the non-fungible token products that can only be purchased with crypto. But, starting last year, those who advertised and posted about their affinity were coming to the party at an awkward time. Cryptos, as we know now, were having their disco moment in 2021; things were looking really good in that moment but it was not to last.
In the fall of 2021, Matt Damon told us to be brave, specifically saying “fortune favors the brave” right as Bitcoin peaked. It has fallen over 60% since November. Boxer Mike Tyson got in on the NFT craze. He sold some of his life’s most iconic moments in a digital format; perhaps you remember fondly the boxer biting the ear of opponent Evander Holyfield in a 1997 match. Prices for Tyson’s NFTs have dropped more than 95% since first offered last summer. Actress Reese Witherspoon encouraged women to get involved, even partnering her media company with World of Woman which sells NFTs focused on storytelling. Per Bloomberg, average prices for World of Women NFTs have slumped more than 75% since the partnership. Some celebrities tweeted about their favorite coins. Often these are alternatives to the most widely-held Bitcoin and Ethereum. Retired Boston Celtics basketball player Paul Pierce, socialite Kim Kardashian and boxer Floyd Mayweather are being sued by investors in EthereumMax (not to be confused with Ethereum) after tweeting support for the speculative token. Its value soared more than 1,370% in just two weeks in summer 2021 before crashing and being called a scam. Billionaire Mark Cuban wrote on his blog about the coin Titan, which is down 99% since then. He has also, since then, admitted his failures in vetting it better, saying to Bloomberg “it’s really on me for being lazy.” And it is on us to not be lazy. While crypto likely is here to stay, it is still the Wild West. There is no formal regulation; there is no FDIC insurance to bail one out of a fraudulent transaction. While celebrity endorsements in any product help potential buyers feel comfortable, arm yourself with your own smarts and vigilance.