Is Meme Stock Mania Back
Could this be Meme Stock Mania 2.0? GME has retreated from its highs – should we be buying?
While we do not know if Meme Stock Mania is coming back, we see quite a few substantial differences in the environment that make us think that Meme Mania, the way we remember it from 2021, is not coming back.
At least not yet. And for sure, we are not buying GME stock “for a bounce.” Why is that so?
Understanding Market Manias: Buyers’ Panics and Sellers’ Panics
Stock markets tend to be a bit manic-depressive. The depressive side is more common, but periods of manic buying have occurred. Generally, investors refer to these periods as “buyers’ panics,” contrasting with the depressive side of the stock markets, typically labeled as “sellers’ panics.”
Buyers’ panics tend to occur, usually when stock markets have several good years in a row, when consumer confidence is relatively high, and credit is readily available. One of the clear examples of buyer panic in the recent past is the internet bubble of 1999-2000. Another one is the emerging markets bubble 2007, when Chinese stocks nearly doubled in just one year.
What is familiar about both examples – several years of good market performance and excessive consumer and investor confidence:
As our readers can see, the internet bubble 2000 occurred when the University of Michigan Current Conditions Index was above 110 (an all-time high). The emerging market bubble of 2007 occurred when the same Index was again near that magical level of 110. However, the meme-stock mania of 2021 occurred when the index was relatively speaking more depressed – at a level of 90. Something that may not have happened before.
Meme Stock Mania and the Role of Negative Real Interest Rates
Did “the big old books” miss something? Yes, they did. The meme stock mania in 2021 was triggered not by excessive optimism but rather negative real interest rates.
In the history of the financial markets since 1980, 10-year real interest rates have only been negative in 2012 and COVID-19 (2020-2021). While 2012 was the period of the European Government Debt Crisis and the stock market, the University of Michigan’s Current Conditions Index had much worse readings. At least to us, it would appear that the Federal Reserve made the meme-stock mania of 2021.
Anyway, as we move to the present, the stock markets are displaying strong performance, and consumer confidence has nicely recovered. However, we are still far from the realm of “irrational exuberance,” which is typically expected when readings near 110 in the University of Michigan Current Conditions Index. Additionally, 10-year real interest rates have soared to a decade-high of 2% per annum, making credit far from cheap.
Conclusion: Staying Cautious Amid the Hype
In conclusion, we are going to say that while meme stock market mania spirits are probably quite alive and well, the environment is not conducive to another mania.
We certainly could be wrong, but we plan to take a pass for now. We will closely watch 10-year real interest rates and the University of Michigan Current Conditions index.
If history is any indication, meme stock mania could be back, but maybe a few years from now.