A gloomier market mood is created, a year after the madness of GameStop

At that time last year, millions of amateur investors jumped into risky corners of US financial markets in pursuit of wealth, firing shares of oppressed retailer GameStop thousands of percent higher and leaving professional fund managers puzzled.

Big and small investors are now watching the stakes that have determined speculative mania dwindle as the Federal Reserve withdraws from a stimulus program that has kept markets high for nearly two years.

Stock prices of memes, cryptocurrencies, cannabis companies and empty-check vehicles, known as the Spacs, plummeted as air hissed at the assets that encapsulated this fierce rally, leaving no doubt that the market game has changed.

“The Federal Reserve is not in business to support valuations of equity, cryptocurrencies or Spacs,” said John Leonard, global equity manager at Macquarie Asset Management. “Long-term stocks of hypergrowth have been pulled out and shot.”

The average value of shares in Russell 3000, a broad measure of the US stock market, has fallen by about 35% from its highest point in 12 months, according to data analyzed by the Financial Times.

Linear chart of productivity from November 2021 (%), showing For three months the air leaked from the speculative parts of the market

At the Nasdaq Composite, home to dozens of fast-growing companies that were in vogue during the depths of the pandemic, the average decline is close to 45 percent.

Russ Koesterich, portfolio manager at BlackRock, said the speculation was fueled by an “extreme liquidity environment” after the coronavirus hit.

As the pandemic devastated communities around the world and shook financial markets, the central bank and the US government intervened by injecting trillions of dollars into the economy to prevent a financial crisis.

“It was a big headwind for all kinds of risky assets: these were Spacs, these were IPOs, these were cryptocurrencies,” Koesterich said. “You’ve seen a setback in all of these recently, and I don’t think they’re unrelated. The Fed is very clear that they want to control the surplus. It is uncertain how far we will go, but what is clear is that you will not have the same level of support that we had. “

Tensions in the market became apparent even before the Omicron coronavirus variant was declared a problem in late November, when it quickly spread around the world.

Shares of loss-making technology companies have struggled since the initial boom last January and February. But in October and November, they again charged higher fees, reaching their eight-month highs on Nov. 9, the day Rivian electric vehicle startup set the price of its initial public offering, according to a Goldman Sachs index. . A day later, the price of bitcoin jumped to a record just under $ 69,000.

Graph: Retailers have given up call options as bitcoin has fallen

The euphoria was short-lived. While Rivian’s market value rose by a few days and briefly outpaced that of Volkswagen, inflation data shook the Fed and investors. Markets began to adapt to a new reality in which interest rates and easy policies were no longer guaranteed.

Shares of previously high stocks, including Virgin Galactic, sports betting site DraftKings and plant-based meat producer Beyond Meat, fell more than a third between early November and the end of the year. Bitcoin, which many investors now see as a measure of speculative asset sentiment, fell sharply, halving at one point in November.

Ryan Jacob, a veteran technology investor who manages the Jacob Internet Fund and a technology-focused ETF, said the crypto market had an “echo of what happened in the dotcom boom” when many investors were convinced the new technology had potential , but they found it It is difficult to say which businesses in the new space will start.

“Some very big companies will come out of this, but that’s the easy part,” he said. “The hard part is finding who. Ninety percent of companies can be complete rubbish. ”

For companies that are at the center of the madness of meme stocks, the changes are particularly drastic. Shares of video game retailer GameStop fell about 80 percent from last year’s record. This is still far above the price that prevailed before the daily traders on Reddit, some of which accumulated in the r / WallStreetBets bulletin board, helped cause a “short squeeze” to hurt hedge funds betting on stocks. But daily traders have largely moved forward.

GameStop and other so-called memes, such as AMC Entertainment, retailer Express and Nokia, have collapsed.

Line chart of daily value of traded shares (billion dollars), showing that trading in shares of meme decreased

Instead, investors turned to other parts of the market, including options they had largely avoided last year. Given the more problematic market movements – the S&P 500 and Nasdaq are no longer reaching record highs after record highs – traders set records this month when buying put options on stocks. Contracts offer protection and the potential for profit from market downturns.

Wall Street strategists noted that many of the new put options were bought and sold on the same day, indicating that retailers are not just trying to hedge against a sale. Instead, it signals that they are trying to profit from fluctuations in options prices throughout the day.

Preston Seo, a US-based YouTube influencer, recently surveyed his followers and said most said they were looking for bargains but flooded his inbox with guidance requests.

“Many of these younger investors on the surface may seem confident in ‘buying down’. But behind closed doors, they are beginning to worry because they have probably not experienced such a decline, “said Seo.

The threat of higher interest rates has helped fuel this concern. The Fed said this week that it would raise interest rates in March for the first time since 2018, with President Jay Powell leaving the door open for even more aggressive action to curb inflation and cool a fast-growing economy.

“People who invest everything there will understand that there is no shortcut to wealth. . . this kind of speculative fervor is eventually released, “said Randy Frederick, managing director of trade and derivatives at Charles Schwab. “The good thing is that it hasn’t taken over the whole market.”

Frederick added that the recent turnaround will teach a difficult lesson for all new traders who focus their investments on a small number of assets.

“Each generation must learn these mistakes on their own, no matter how many of us who have been around for some time will try to warn them,” he said. “Every time it’s a different game, but the ending is always the same. It’s hard to say when that will happen. “

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