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Meme stocks have been selling off since Mid-November amid waning interest from retail investors. Anthony Okolie speaks with Jimmy Xu, Portfolio Manager, TD Asset Management, about whether the meme-stock frenzy may be over or if there is still room to run.
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- Meme stocks have been all the rage among retail investors during the COVID-19 pandemic. But by the end of 2021, a few of those names have fallen to multi-month lows. Jimmy, what's driving the recent drop in meme stocks?
- Hi, Tony, and happy new year. A lot of things have happened since the meme stocks have risen historically in the first half of last year. What we've seen is by Q4, meme stocks had tumbled by more than 40%, in some cases almost 50% since its peak.
And when we look deeper into what's happening, a lot of that tumble isn't fundamentally driven. Some of these companies had pretty terrible earnings last quarter. But these meme stocks have poor fundamental regardless. So it's not the earnings that are driving. I think what really drives meme stocks is supply and demand from retail investors.
These stocks are predominantly held by retail investors. There are very few, if any, institutional players involved. So the rise and fall of these prices are going to be driven by the demand from the retail investors. And when we look at some of the major brokerage data in the US, we're seeing some waning of interest from these types of investors.
We're seeing almost 10% decline in volumes from retail investors and 24% decline in new account openings. So certainly, the reopening has taken a bite out of the market's luster from retail investors and even a small order when the lack of incremental buyers can caused lots of volatility. And that's certainly what we've been seeing in the meme stocks over the last six months.
- And has there been any underlying changes in the actual environment that has been triggering the latest sell-off in some of these names?
- Yeah, I think the environment that we're in from last March to today are extremely different. And think back into last March, unemployment rate was still close to 9%. And people were still sitting at home collecting pandemic checks. Most of the economy were under lockdown. There aren't a lot of places to spend that money. Liquidity was abundant.
And those type of environments typically help fuel these type of speculative behavior. And we saw that during the rise of some of the very popular meme stocks early last year. But fast-forward to today, I think the environment is very different now.
People are no longer collecting pandemic checks. People are going back to work. Unemployment rate is down to basically 4%, pre-pandemic levels. So people are occupying themselves with other things rather than sitting at home and trying to buy and sell and day trade these meme stocks.
From a macro perspective, inflation-- we're now sitting at almost 25-year highs in inflation. So things are getting more expensive. So there's lots of competition for that savings, for that capital that people have accumulated during the pandemic. And some of that is definitely not going to meme stocks. And that's causing some of the lost interest in the market.
And finally, we're going into a period where the Federal Reserve is tightening monetary policy fairly aggressively. That tightening of financial conditions doesn't only impact meme stocks but it also impacts other, longer duration assets like technology stocks, which has so far under-performed this year.
- OK, so given this change in the environment, do you think that meme stock frenzy still has some room to run?
- Well, it's the first week of this new year. And I don't think I'm in a position to try to call tops and bottoms of any stock, let alone meme stocks that are highly speculative. But I think what's important to remember is that retail investors will continue to be a very important player in the market. And that's something that I think we shouldn't ignore.
And that trend will continue. I think it continues for decades to come. And why this is happening is technology has really enabled everyone to be able to trade stocks and access markets at very low cost and in a very accessible way. So these things are definitely not going away.
And it certainly changes not only how we manage as professional money managers, but we also have to think about how we are going to deliver advice to our clients. And I think that trend is going to be transformative for the decades to come.
- OK. And so how can this decline in meme stocks, how can that impact investors directly?
- Yeah. I think the experience that we went through last year, the rise, and the fall, and the volatility of the meme stocks, it had very small contagion risk to the rest of the market. We've seen stocks rise and fall, but the broader equities market continued on.
The flow-through effect in meme stocks into the broader equities market was actually quite small. But I think it doesn't mean that investors should completely ignore what's happening, because meme stocks can distort various segments of the market. If you think about the small cap index-- so the Russell 2000 Index, one of the most widely followed small cap equity indices-- the top holding of that indice is now a meme stock.
So if you're a passive investor or you're investing in passive investments like passive ETFs or passive mutual funds into small cap, you may inadvertently be buying or being exposed to the meme stocks that you may otherwise not want to have. And so this is where active management becomes extremely important in stock selection-- when you have active managers that can help filter out meme stocks, then that can really protect investors from those type of volatilities. So this is an environment, especially in the small cap space, where I think investors can really benefit from active management rather than buying the whole thing, gaining exposures that you may not want to be exposed to.
- Jimmy, thank you very much for joining us today.
- Thank you.
[MUSIC PLAYING]
- Hi, Tony, and happy new year. A lot of things have happened since the meme stocks have risen historically in the first half of last year. What we've seen is by Q4, meme stocks had tumbled by more than 40%, in some cases almost 50% since its peak.
And when we look deeper into what's happening, a lot of that tumble isn't fundamentally driven. Some of these companies had pretty terrible earnings last quarter. But these meme stocks have poor fundamental regardless. So it's not the earnings that are driving. I think what really drives meme stocks is supply and demand from retail investors.
These stocks are predominantly held by retail investors. There are very few, if any, institutional players involved. So the rise and fall of these prices are going to be driven by the demand from the retail investors. And when we look at some of the major brokerage data in the US, we're seeing some waning of interest from these types of investors.
We're seeing almost 10% decline in volumes from retail investors and 24% decline in new account openings. So certainly, the reopening has taken a bite out of the market's luster from retail investors and even a small order when the lack of incremental buyers can caused lots of volatility. And that's certainly what we've been seeing in the meme stocks over the last six months.
- And has there been any underlying changes in the actual environment that has been triggering the latest sell-off in some of these names?
- Yeah, I think the environment that we're in from last March to today are extremely different. And think back into last March, unemployment rate was still close to 9%. And people were still sitting at home collecting pandemic checks. Most of the economy were under lockdown. There aren't a lot of places to spend that money. Liquidity was abundant.
And those type of environments typically help fuel these type of speculative behavior. And we saw that during the rise of some of the very popular meme stocks early last year. But fast-forward to today, I think the environment is very different now.
People are no longer collecting pandemic checks. People are going back to work. Unemployment rate is down to basically 4%, pre-pandemic levels. So people are occupying themselves with other things rather than sitting at home and trying to buy and sell and day trade these meme stocks.
From a macro perspective, inflation-- we're now sitting at almost 25-year highs in inflation. So things are getting more expensive. So there's lots of competition for that savings, for that capital that people have accumulated during the pandemic. And some of that is definitely not going to meme stocks. And that's causing some of the lost interest in the market.
And finally, we're going into a period where the Federal Reserve is tightening monetary policy fairly aggressively. That tightening of financial conditions doesn't only impact meme stocks but it also impacts other, longer duration assets like technology stocks, which has so far under-performed this year.
- OK, so given this change in the environment, do you think that meme stock frenzy still has some room to run?
- Well, it's the first week of this new year. And I don't think I'm in a position to try to call tops and bottoms of any stock, let alone meme stocks that are highly speculative. But I think what's important to remember is that retail investors will continue to be a very important player in the market. And that's something that I think we shouldn't ignore.
And that trend will continue. I think it continues for decades to come. And why this is happening is technology has really enabled everyone to be able to trade stocks and access markets at very low cost and in a very accessible way. So these things are definitely not going away.
And it certainly changes not only how we manage as professional money managers, but we also have to think about how we are going to deliver advice to our clients. And I think that trend is going to be transformative for the decades to come.
- OK. And so how can this decline in meme stocks, how can that impact investors directly?
- Yeah. I think the experience that we went through last year, the rise, and the fall, and the volatility of the meme stocks, it had very small contagion risk to the rest of the market. We've seen stocks rise and fall, but the broader equities market continued on.
The flow-through effect in meme stocks into the broader equities market was actually quite small. But I think it doesn't mean that investors should completely ignore what's happening, because meme stocks can distort various segments of the market. If you think about the small cap index-- so the Russell 2000 Index, one of the most widely followed small cap equity indices-- the top holding of that indice is now a meme stock.
So if you're a passive investor or you're investing in passive investments like passive ETFs or passive mutual funds into small cap, you may inadvertently be buying or being exposed to the meme stocks that you may otherwise not want to have. And so this is where active management becomes extremely important in stock selection-- when you have active managers that can help filter out meme stocks, then that can really protect investors from those type of volatilities. So this is an environment, especially in the small cap space, where I think investors can really benefit from active management rather than buying the whole thing, gaining exposures that you may not want to be exposed to.
- Jimmy, thank you very much for joining us today.
- Thank you.
[MUSIC PLAYING]
