A year ago, amateur investors on Reddit caused a stir in the stock market by triggering a panic-fueled short squeeze on shares of American retailer GameStop. The episode revealed some fundamental weaknesses in the practice of short selling and transferred substantial wealth from some unlucky hedge funds to a few savvy investors. The GameStop saga also put a spotlight on social media-driven investing and meme stocks, kick-starting a movement that dominated the early months of 2021.
A year later, GameStop’s stock price has fallen in sync with the stock market’s general sell-off. Some experts believe the meme stock ship has sailed, with similar investments like AMC and Blackberry also sinking back to earth.
The State of the Memes
GameStop’s stock has fallen 35% in January, making this month the polar opposite of a year ago. Shares of the video game retailer are trading around $102 Wednesday morning, far from the $155 they were hovering at on December 31. GameStop has suffered from the same factors that have crushed Bitcoin and other growth stocks–looming Federal Reserve interest rate hikes will slow the economy down this year.
A slower economy typically results in higher treasury bond yields. This means that growth stocks that don’t pay dividends have higher opportunity costs during economic slowdowns. The Fed will likely hike interest rates three times in 2022 while also slimming its balance sheet to reduce the volume of liquid capital in the economy. This makes it more difficult for investors to consider risky growth stocks a safe bet.
Other meme stocks aren’t safe from this pattern, either. AMC Theaters, another amateur investor favorite, has dropped over 40% this month. The struggling theater chain faces systemic challenges in luring moviegoers back into its doors. AMC needs to compete with streaming services like Netflix and Disney+, which are more affordable than movie tickets and concessions stand snacks.
The theater chain started the year around $30 per share but has sunk to only $16.50 by Wednesday morning.
The issue for both AMC and GameStop is that analysts don’t expect either company to turn a profit this year. GameStop is fighting an uphill battle for relevance as a brick-and-mortar retailer in a digital landscape. AMC is in a similar position, living on as a relic of a different era while the market moves into new configurations. New Constructs CEO David Trainer explains, “Investing in meme stocks carries reckless and unnecessary risk, which puts an investor’s portfolio in danger of potentially devastating declines.”
The meme stock explosion last year also enriched fee-free brokerage Robinhood. The stock trading app went public last year, becoming something of a meme stock in its own right. After a shaky start, the app looked set to become the next craze for amateur investors. This popularity didn’t last, though, and Robinhood has now fallen to just $13 per share. The brokerage’s stock price has plummeted 27% since the start of the year.
Some retail traders on Reddit are celebrating Robinhood’s financial misfortune. The brokerage temporarily paused trading of GameStop stocks last year during the height of the craze. This drew swift criticism from amateur investors, many of whom accused Robinhood of colluding with hedge funds to halt the sale of the red-hot stock.
Robinhood defended itself by stating that it had insufficient collateral to offer its clearinghouse. This means that the brokerage couldn’t afford to execute all of the trades its clients were demanding in January 2021. The app paused trading on the popular shares while it collected collateral for the exchange.
Are Meme Stocks a Good Thing?
Some institutional investors have characterized the pullback in meme stocks as a return to stability for the market. Others aren’t sure that meme stocks are bad for the market. After all, the surge of retail traders indicates further democratization of the stock market. The influx of young investors in 2021 caused trading demographics to shift, bringing many Millennials and Gen Z enthusiasts into the stock market.
Financial advisors have struggled in recent years to convince young people to invest in the stock market. Many younger professionals are skeptical about trading because they grew up in the middle of the 2008 financial crisis, coloring their perception of hedge funds and the stock market.
“Last year’s meme stock craze brought a surge of new, younger investors to the stock market,” says Keith Chan, president of trading app Moomoo.
“This is not a passing fad. Investors are not done with meme stocks just yet. However, the speculative and volatile nature of this asset class underlines the critical need for a cautious approach when it comes to trading meme stocks.”
Meme stocks showed young investors that social media and the stock market can overlap. The slowdown in meme favorites like GameStop and AMC could indicate that amateur traders are losing interest in the stock market since there haven’t been any dramatic short squeezes following the GameStop incident in 2021.