There is room in the market for both apes and tortoises, and the opportunity for a large army of investors who are chasing a 2,000% increase in AMC Entertainment. Meanwhile, a much larger percentage of investors is quietly putting money into stock funds to participate in the background growth of the economy.
Just like when a group of Robinhood-armed amateur speculators purchased stock en masse last year, the action-based video game-style viral movement seen in AMC and the company’s uncaring and provocative promotion of retail investors to raise capital has generated lots of hand-wringing and muttering amongst market observers.
Vanguard, the preferred destination of the get-rich-slowly crowd, has taken nearly $300 billion into its ETFs alone over the last year, accounting for 40% of industrywide ETF inflows. Bank of America’s private-wealth clients have allowed their collective equity allocation to rise to a record high of more than 64 percent, the firm announced on Friday.
According to Citigroup strategist Tobias Levkovich, “while the focus on increased equity market participation by individual investors has received a lot of attention, especially given extraordinary moves in some meme stocks, money flows into equity funds have chased the tape.”
So far, I’ve chased the tape and caught some pretty good gains. The S&P500′s total return for the year is now 13.3 percent, an annualized gain of 34.3 percent, with the steepest pullback a brief 6 percent shakeout.
Market advance that is calm and rational
In fact, the most notable and broadly applicable observation about the latest meme mania is how calm the core stock market has been, hovering for the past seven weeks within a consistent band just below record highs. Stocks have reacted to prevailing macro forces and historical rhythms pretty much exactly as theory and experience would predict.
After a massive 90 percent run off the March 2020 low in 13 months, the tape flattened out and saw some choppiness, as previous patterns predicted.
Treasury yields increased dramatically from last summer to March, with the 10-year yield more than tripling to 1.75 percent, resulting in one of the worst first-quarter bond returns ever. Since then, they’ve consolidated in a typical mean-reversion fashion, while maintaining their longer-term uptrend and supporting cyclical leadership inequities. The chart of the bank-stock index is a near-facsimile of the 10-year Treasury yield chart, just as it should be, according to the textbook.
According to FactSet’s John Butters, the S&P500 has closely tracked the upward revision in earnings forecasts for the second quarter. One for the believers in rational markets.
According to Citigroup strategist Tobias Levkovich, “while the focus on increased equity market participation by individual investors has received a lot of attention, especially given extraordinary moves in some meme stocks, money flows into equity funds have chased the tape.”
Market advance that is calm and rational
In fact, the most notable and broadly applicable observation about the latest meme mania is how calm the core stock market has been, hovering for the past seven weeks within a consistent band just below record highs. Stocks have reacted to prevailing macro forces and historical rhythms pretty much exactly as theory and experience would predict.
All of this is not to say that the stock market is perfectly efficient, correctly valued, or completely predictable. Even the most methodical tortoise can become overextended inequities. The market will have to deal with some economic sluggishness, a reduction in fiscal support, and the eventual winding down of Federal Reserve accommodation.
And the voracious, indiscriminate gunning of upside call-option bets on AMC and a slew of other viral “story stocks” is reaching new heights, falling just short of January’s all-time high. This behavior eventually qualifies as a contrarian indicator as well as a potential stressor on market function.
Interesting sideshow
The parallel coexistence of heedless momentum traders and methodical asset allocators, on the other hand, suggests that the meme-stock stampedes can be viewed as more of an amusing sideshow than a speculative fever overtaking the tape. It’s fair to say, as AMC did, that AMC shares have become almost completely divorced from the business, while also acknowledging that the market overshoots in individual stocks and sectors on a regular basis in similar magnitude.
Even if AMC’s $24 billion market capitalization with $5.5 billion in debt were entirely irrational, the market constantly undervalues companies by $30 billion. Zoom Video, for example, has lost $40 billion in value in the last six months, causing far less concern and recrimination. Accounting, forecasts, guesswork, emotion, and crowd psychology have always influenced market prices. In addition, in some cases, imagined short squeezes.
“The stock market is a device for transferring money from the impatient to the patient,” Warren Buffett famously said.
Yes, eventually. However, the market has always featured both quick money and patient capital, flippers, and holders. And, even if tortoises live longer, enough of the impatient players do well enough for a while that they attract the next generation of short-termers.
