After the Memes
#78: If rampant speculation was evidence of a market bubble, what does it mean now that the obvious bubbles have popped?
It came with a boom, but left with a whimper. The rocket to the moon was diverted mid-flight. The era of the meme stock is officially over.
Even as the S&P 500 has rebounded 14% YTD in 2023 and stands within 10% of the all-time highs notched in 2021, the fuzzy feelings have not been broadly shared. The darlings of the pandemic — speculative tech, SPACs, and nostalgic brick-and-mortar establishments — continue to languish, showing few signs of life. The once bubbling enthusiasm of newly minted day-traders has dissipated.
Robinhood’s Monthly Active Users (MAU) fell to 10.3 million in September 2023, marking the eighth decline in the last nine quarters. In total, the company has lost 52% of its active users from the peak in mid 2021, while its own valuation has fallen by 75% since its IPO.
Meanwhile ARK Investment’s flagship Innovation ETF (ARKK) — once the poster child of the roaring market — trades at just a quarter of its peak value and has provided zero return since 2018, even as the Nasdaq 100 has more than doubled.
The apes of AMC have experienced 97% drawdown, as the stock today trades well below pre-pandemic lows. By market cap, the company has lost $30 billion or 95% of its value. Other old-economy meme stocks, Gamestop and Bed Bath and Beyond, have suffered similar fates and ringleader Ryan Cohen is now the subject of SEC probes.
Blank check SPACs have proven to be the disaster that many predicted, with an index of de-SPAC’ed companies down over 90%. With WeWork filing for bankruptcy this week, Bloomberg counts 23 de-SPACs that have now gone bankrupt while 110 trade below $1 per share.
With hindsight, we say with confidence that February 2021 was indeed the peak of irrational exuberance, nonsense valuations, new-era thinking. It also marked the peak of public interest in the stock market. Since then, the animal spirits have been gradually tamed, and retail enthusiasm has waned.
But this post is not a belated and obnoxious “I-told-you-so”. After all, bears were steamrolled on the upswing long before the meme stocks tumbled. Instead the purpose is to identify how the market has changed as it rebounds towards former highs.
If the rampant speculation in 2021 was evidence of a “market bubble”, what does it mean now that the obvious bubbles have popped? If the worst excesses have already been washed out, is the market more stable today?
Today, the market — both its risks and opportunities — has evolved.
Digesting the Bubble
The end of the meme stock era has both positive and negative implications. On the one hand, the decline in retail interest may be a reflection of weakening economic conditions. On the other hand, the reset of sentiment and valuation creates opportunity, while lower volatility aids market stability.
Demand: Just as demand for goods and services surged on the back of pent-up savings and fiscal transfers in 2021, demand also surged for financial assets like stocks. In other words, the meme-stock bubble was itself indicative of the financial strength of the public. People had cash, and enough confidence in their financial situation to take investment risk. You can only throw money at stonks if you have money to throw.
FINRA data on aggregate brokerage account balances demonstrates this point. In January 2021, margin accounts commanded $241 billion of stock buying power, the largest on record. Since then, dry power has declined 41% to just $141 billion today, the lowest level in data going back to 2010. Similarly, purchasing power in cash accounts has declined by 39% since the record levels in March 2022.
Indeed, death of the meme-stocks has occurred along with the gradual slowing economic growth, softening labor demand, and a decline in excess savings. To the extent that the decline in day-trading and retail stock interest is indicative of waning financial resources and overall demand, it is a potentially bad omen for macroeconomic conditions.