“Meme” conceptually originated with Richard Dawkins in his 1976 book “The Selfish Gene.” Its initial genetic connotation has since evolved into a form of symbolism that spreads by imitation from person to person. During 2021, “meme stocks” became synonymous with companies having arguably dubious long-term business prospects and a cult-like following of stock traders that created buying frenzies through social media resulting in sky-high share price increases. It was not uncommon for video game retailers with physical locations (GameStop) or movie theaters (AMC Entertainment Holdings) to quickly double or triple in price. The intrinsic value of an investment is irrelevant, all that matters to a meme trader is if there will be someone willing to pay more than them (minutes) later. However, just as “a rose with any other name would smell as sweet,” a meme stock is effectively just another name for an illegal “pump and dump” scheme.
The advent of commission free trades may have helped to “democratize investing” but it has also aided and abetted meme schemes. Coupled with Robinhood’s gamification of investing, commission free trading has also significantly shortened investment time horizons and effectively turned some financial markets into giant casinos. According to the CBOE (Chicago Board Options Exchange), options trading, which can be riskier than stock trading, surpassed stock trading activity during 2021 for the first time in history (based on notional value). There are now over 8,000 cryptocurrencies to choose from, more than all the stocks listed on the New York Stock Exchange and NASDAQ, combined. However, unlike sports gambling and casino games, there is a time value associated with most investments and its outcomes are rarely instant and/or binary. Alcohol has also played a role with 59% of Generation Z traders claiming in a recent survey by MagnifyMoney to have bought or sold an investment while inebriated. This “greater fool” approach to investing can work extremely well, until like water, a highly overvalued stock seeks the level of its intrinsic value. Or, to paraphrase the philosopher Homer Simpson, alcohol can be both the cause of and the solution to all of life’s problems.
2021 was the third straight year of double-digit gains for the S&P 500. During the year, this index made 70 new all-time highs. However, in addition to the extraordinary returns from “meme trading,” most of 2021’s stock market performance was concentrated among relatively few large cap stocks with the ten largest experiencing an average total return of 49.6%. These ten companies are selling with an average price to earnings multiple of 70 while the index as a whole is selling for 21 times earnings. As a result, the valuation of the S&P 500 Index has become “top heavy.” On average, US stocks finished the year down 28% from their peaks and 38% of NASDAQ stocks have fallen 50% or more from their highs during the year. Tech stocks equally weighted were up only about 14% for the year and two thirds of the companies that went public via initial public offerings during 2021 are now trading below their IPO prices. Diversification is often referred to as the only “free lunch” in investing but the returns from international markets were unpalatable with the Vanguard FTSE All-World ex-US index finishing up just 6.3% and the MSCI Emerging Markets Index down -4.8%. China was down -22% and bonds were certainly not a safe haven with the US Aggregate Bond Index finishing the year down -1.6%.
Inflation as measured by the consumer price index is currently running at 7.0%, well above the Fed’s target rate of 2.0%. Gas prices are over $3 per gallon for the first time in over six years, prices for used cars have increased 42% year-over-year and standard Medicare Part B premiums will be increased by 15%, one of the largest annual hikes in the history of the program. The unemployment rate is currently just 3.9% but 2021 will be remembered as the year of “The Great Resignation” with over 38 million quitting their jobs. While many switched jobs, employers are still trying to fill 11 million openings with just 6.9 million unemployed actively searching for work. According to the Labor Department, 3 million workers retired early because Covid changed attitudes toward work at a time when stock and housing market gains made doing so feasible. 2022 is a mid-term election year which historically have been referendums on the party in power. Inflation currently polls as the key issue for consumers and by extension voters as their after-tax, after-inflation income is underwater. According to Strategas, midterm election years have been the most volatile for the S&P 500 during the four-year presidential cycle with the market correcting an average of 19.0%. With Washington D.C. more divided than ever, the era of the open check book seems over. Monetary and fiscal policy will likely be noticeably tighter in 2022 and the returns of the equity market indexes will likely be modest. Dividends are likely to be a more important component of total returns during the new year and with 45% of the companies in the S&P 500 yielding more than the US 10-Year Note, there are seemingly a lot more stocks to like under the market’s surface for 2022 than toward the top of the S&P 500 Index. As such, the current environment for financial markets seemingly favors active managers like Inlet Private Wealth.
Ted E. Furniss, CFA – February 2022
IMPORTANT DISCLAIMER: Inlet Private Wealth®, LLC (“Inlet Private Wealth®” or the “Firm”) is a SEC registered investment adviser with its principal place of business in Jupiter, Florida. Unless otherwise noted, all data has been obtained via Bloomberg®. Inlet Private Wealth and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Inlet Private Wealth maintains clients. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. The data contained in this report was gathered from what we believe to be reliable sources, but we cannot guarantee its accuracy. For information about Inlet Private Wealth’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).