Return of meme stock mania has traders on alert for market froth
meme stock mania
last week has professional investors facing a quandary: ride the excitement of
retail traders
or take it as the latest warning sign that the frothy markets are due for a pullback.
The speculative stocks caught up in the frenzy this week, like Opendoor Technologies and Kohl's, gave up some of their gains as the week went on, but most are still trading at their highest levels in months. The broader S&P 500 Index and Nasdaq 100 Index are doing even better, sitting at all-time highs after charging back from the early April selloff set off by President Donald Trump's tariff announcements.
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Undo
There are indicators that investors are abandoning restraint and betting on further gains. The amount that investors are borrowing to buy stocks on the New York Stock Exchange, known as
margin debt
, has exceeded the tech-bubble highs to reach a new record, according to data from the Financial Industry Regulatory Authority.
But signs of fatigue are creeping in. The latest meme stock rally seemed to lose steam after just a few days, and
Bitcoin
, one of the most visible symbols of the speculative fever, has recently fallen back from its record highs. Some Wall Street trading desks have been urging clients to scoop up discounted protection against possible losses. The current run has stretched valuations, with the S&P 500 trading at nearly 23 times forward earnings, well above the ten-year average of around 18, signalling that stocks have gotten significantly more expensive.
"I'm seeing it and just starting to just tuck my horns in a little bit," said Eric Diton, president and managing director of the Wealth Alliance. "I'm longer-term bullish, but I'm just short-term cautious. I really think we're overdue for some kind of a pullback again because of the excessive speculation."
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For help in navigating the volatility, some market watchers are looking for comparisons with the most famous meme stock moment back in January 2021, when GameStop and AMC Entertainment captured the world's attention.
That buying was fuelled by retail traders who were flush with stimulus checks and stuck at home, swapping tips on social media. It came after a banner year in the markets, in 2020, but ended up being only the beginning of an even bigger rally in 2021, when the S&P 500 rose another 27%. There was, though, eventually a reckoning in 2022 when the index plunged 19%, notching the worst yearly performance since the great financial crisis.
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My next question is which sector is poised to benefit the most after this deal? Swaminathan Aiyar: At the end of it all, this freeing of trade will change things. But if already the UK is not among your top 10 trading partners, you cannot expect this to really change the whole scenario. If already the trade is low, it means the complimentarity between the two countries is not that high. It is much higher with China and the USA and much less with the UK. So, the overall scope for trade is limited, but we are increasing it and every increase is a good thing. Live Events You Might Also Like: India-UK FTA: Scotch whisky, gin tariff cuts unlikely to impact retail prices We have often talked about improving the conditions for Indians to move to the UK for work. This used to be one of the things that was holding up an agreement. There, we have a good deal. Indians can work in 35 sectors for two years without any office and that means you can land up there and just work from your residence with zoom and you can be functioning without going through all the difficulties of setting up a formal sector and there is an exemption for social security. This is important. A significant part of your salary, anything you earn when your people go to the UK, is cut and goes towards your long-term pension. Our fellows are going there to do IT or other work for one year, for two years, for three years, so there is no point in them paying into social security when they will get nothing out of it once they retire. You have to work a very large number of years before you can get those benefits. Earlier they resisted it and said they were not going to do it. The United States still has not allowed this, but Britain has given what the United States has not given and this is very useful. I do not know the exact rates of the deduction for different categories, but 10-15% or sometimes 20% of your salaries went in these various deductions. If that gets reduced, there is that much more these Indian professionals will be able to send home. So that is a positive thing.
