With stocks and crypto tumbling, inflation soaring and the Fed poised to tighten policy, what’s a trading revolutionary to do?
Exactly one year ago today, Chris Perrotta joined a revolution on Wall Street: He bought one of those crazy meme stocks — and went on to make a small fortune.
Today Perrotta, like countless other amateur traders who pushed stocks “to the moon” and challenged the pros during the early 2021 mania, is watching the old dreams of a new Wall-Street order collapse around him.
Meme stocks, cryptocurrencies, the broader stock market: All have tumbled with astonishing speed this year, and few strategists think the pain will end here.
The losses are sobering, but so too is the realization that the social-media inspired revolt against Big Money is painfully slamming against market realities.
Perrotta, 37, says he bought 3,000 shares of AMC Entertainment Holdings Inc. on Jan. 25, 2021, at about $5. As AMC shot to as high as $60, he made enough to pay off his new truck. To celebrate, he got a license plate that reads “STONKS.”
“Everyone was playing with new money,” Perrotta, a power-company worker from Nova Scotia, says of the frenzy a year ago. “Right now, I kind of see it as being on the precipice.”
He adds: “A lot of those people are going to start seeing losses.”
Many already have. Over the past two months, AMC and GameStop Corp. have tumbled more than 50%. A basket of 37 meme stocks tracked by Bloomberg have gone on a seven-day slide that has wiped out 15% of its value. A measure of companies that went public by merging with special-purpose acquisition companies, known as SPACs, has crashed 65% from a February high.
But the shift goes beyond profit and loss. WallStreetBets, the Reddit forum that unleashed the GameStop, AMC and “stonks” craze, is getting little attention. It was trending on Twitter a year ago.
Robinhood Markets Inc., whose free trading app lured many to the market and set the stage for its own initial offering, has itself become a powerful symbol of the reversal, with its shares 85% below a high in August. For now, the small timers who dreamed of beating the big money have gotten a hard lesson about who rules the markets.
Market participation by retail traders has come down from the historic levels during the pandemic — it peaked in the first quarter of 2021 at 24% — to about 18%, according to Bloomberg Intelligence.
“Most retail investors don’t know how to trade this market,” said Larry Tabb, the head of market structure research at Bloomberg Intelligence. “They buy — price goes up, they sell and buy again. But when the market falls, they aren’t sure how to short, don’t understand options and when they buy and lose, they tend to think prices will rebound so they hold on, instead of selling out.”
Sure, a few retail investors made millions of dollars. Some quit their jobs. Others paid off their student loans. But with inflation running at the fastest pace in almost four decades, the Federal Reserve is forecast to tighten policy — meaning there’ll likely be less money sloshing around the economy that can go into shares of brick-and-mortar video game retailers or struggling movie-theater chains.
Some comrades had long ago moved on to the next frontier: Cryptocurrencies and NFTs in the metaverse.
“For a long time, everyone was playing with new money, which further perpetuated all that momentum,” Perrotta said. “But now that some of that has leveled out, it takes a lot of steam out of what people’s expectations might be in the short term.”
Increased market participation by retail traders means that even if the Fed delivers on its promise to raise rates, it won’t necessarily keep people from investing, said JJ Kinahan, chief market strategist at TD Ameritrade.
Instead, it could stir them towards other vehicles that may not have been a great choice over the past five years but suddenly could look more attractive, such as bonds.
“These are people who can start to understand the different products that they can choose for their own financial futures,” Kinahan said. “The market is constantly changing, and this is one more way.”
Ashley Duncan has changed with the market. The 29-year-old from Dallas followed a trajectory similar to many other traders. She started buying up meme stocks when she heard about GameStop in late January. That led her to cryptocurrencies and then to NFTs, which is where she struck gold.
“With stocks, that was kind of my base,” she said. “That was where I made the money to fund what I have now.”
What she has now is a lucrative NFT business partnering with the American Cancer Society. Duncan says she initially made some $20,000 on a combination of meme and cannabis stocks in early 2021. She sold half and put that money into crypto. Her time in crypto led to what is called the “Crypto Titties” project. She is currently plotting her next NFT endeavor called “She Survives.”
Inflation — and how the Fed responds — is forcing retail investors to recalibrate. In October, Drew Wisdom — a 30-year-old real-estate asset manager from Louisville who started investing in meme stocks during last year’s wave — kept coming across articles from financial influencers (or “finfluencers”) warning about inflation. He liquidated a significant portion of his stock portfolio and transitioned into crypto.
“The natural train of thought is: ‘If my dollars are going to be worth less, where can I put my money — my net worth and wealth — so that it’s not going to lose money?’” he said. “And then it was like, ‘Well, duh. Crypto.’”
Some retail investors were hoping more regulation of big Wall Street organizations in the wake of the GameStop and AMC frenzy. Not much has come of it.
“The SEC hasn’t done anything, the DOJ hasn’t done anything, there hasn’t been real change,” said Michael Arevalo, a 31-year-old day trader from New York City.
Congress held a hearing with the players involved in the GameStop drama in February. And in December, Bloomberg News reported that the U.S. Justice Department had launched an expansive criminal investigation into short selling by hedge funds and research firms, scrutinizing their symbiotic relationships and hunting for signs that they improperly coordinated trades or broke other laws to profit.
Still, while retail investor participation in the market will probably decline, the combination of social media and free trading isn’t going anywhere.
“What the Street has learned is that a lot of the changes that drove that spike in retail participation last year were structural, not cyclical,” said Ben Laidler, global market strategist at the platform eToro.
But will January of last year repeat itself? Laidler thinks that because meme stocks have gone more mainstream and broadened to include more companies, the focus that drove GameStop so high is now gone.
“If I go to 10 people and ask them, you know, ‘Give me the five meme stocks,’ they’re all going to give me GME and AMC, but then after that, they’re all going to give me different names,” he said.
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