Over Memorial Day, I attended a picnic and overheard some young professionals talking excitedly about the resurgence of “meme stocks” like GameStop and AMC Entertainment. Everyone had a story about someone who knew someone, who made a lot of money “investing” in these names. The “fear of missing out” (FOMO) was palpable, and the scene was all-too-familiar.
History does not repeat itself, but it often rhymes. Twenty years ago, we saw this same sort of irrational excitement over dot com stocks. FOMO is a powerful behavioral force in finance. It drove investors to pile their savings into stocks in the dot com days, many of which had no profits and no reasonable path to profitability. The conclusion of that saga was predictable, with the Nasdaq Composite falling nearly 80% from its peak. Risk appetites are high again today. We once again see irrational demand for stocks and other assets with weak or no fundamental foundation, like cryptocurrencies, SPACs, and NFT art. Cracks have already begun to form, with Bitcoin down over 40% and SPACs underperforming. Yet meme stocks are seeing a resurgence.
We have had clients ask us if our portfolio strategies hold meme stocks within their exchange-traded funds. Some are interested in owning them, while others want to be sure we have steered clear. We have no rule against owning a meme stock, but our process focuses on identifying holdings based primarily on four criteria: Good Value, High Quality, Positive Momentum, and Small Size. Most meme stocks will fail the value and quality test. However, if any do pass our test, they will be in our well-diversified strategies for the right reasons and not because an impassioned post on Reddit left us with FOMO.
Headlines This Week
Jobs in May
- The U.S. added 559,000 jobs in May, somewhat below street expectations of 650,000. Last month our economy added 266,000 jobs, versus the expectation of about 1 million.
- Leisure, education, and motion picture industries saw the biggest job growth in May, while construction and U.S. Postal Services were the biggest laggards.
- The initial jobless claims are steadily improving, with last week’s claims falling to 385,000.
On the Hill
- Infrastructure negotiations continue, with the White House tweaking its corporate tax proposal. But a bipartisan deal still appears to be a long shot.
- The Senate will return this Monday from recess. Some expect that the Senate will move forward with a much bigger infrastructure bill, leaving Republicans aside by passing the bill through the party-line reconciliation.
- The COVID recovery in the U.S. continues to improve, as covid-related daily cases and deaths trend lower.
- New COVID cases and deaths are at 52-week lows, with current daily new cases of about 15,000 and about 43 deaths.
- The White House is targeting 70% vaccination by July 4th, which would make for an excellent summer and Independence Day if achieved.
Quotes from the FED’s Beige Book*
- The national economy expanded at a moderate pace from early April to late May, a somewhat faster rate than the prior reporting period.
- Light vehicle sales remained solid but were often constrained by tight inventories.
- Factory output increased further even as significant supply chain challenges continued to disrupt production.
- Manufacturers reported that widespread shortages of materials and labor, along with delivery delays, made it difficult to get products to customers.
- Homebuilders often noted that strong demand, buoyed by low mortgage interest rates, outpaced their capacity to build, leading some to limit sales.
- The lack of job candidates prevented some firms from increasing output and, less commonly, led some businesses to reduce their hours of operation.
- Overall, wage growth was moderate, and a growing number of firms offered signing bonuses and increased starting wages to attract and retain workers.
*Beige Book June 2, 2021 – https://www.federalreserve.gov/monetarypolicy/beigebook202106.htm
The Week Ahead
Central Banks Under Pressure
The European Central Bank (ECB) and the Bank of Canada (BoC) will meet next week to make interest rate decisions, among other monetary policy decisions.
- Next week’s ECB rate meeting is sure to attract attention given the recent rise in long-term yields across the region, along with an increase in headline inflation.
- These market movements raise questions about how long the central bank can continue to accommodate its asset purchasing program.
- While scaling back the program is unlikely to start this month, investors are keen to see if the ECB will begin to take more of a hawkish stance as it becomes harder to avoid the taper topic.
- On this side of the pond, the Bank of Canada is very likely to keep its policies stable after becoming the first central bank to start tapering its asset purchasing program in April.
How High Will It Go?
Next Thursday, the Consumer Price Index (CPI) will be back in the hot seat as all eyes check-in on May’s inflation data.
- After April’s numbers shocked the market when US CPI jumped sharply to 4.2%, well above expectations of 3.6%, the market has been watching to see how high inflation will go.
- The 12-month CPI rate is expected to rise again to 4.6% for May, while the core rate will also increase to 3.4%.
- While the Fed has continually reiterated that it expects transitory inflation and has the tools to deal with it, the market could grow skeptical if inflation does not start to cool off in the second half of the year.
Apple’s Big Week
If Apple (AAPL) products pique your interest, the company’s Worldwide Developers Conference (WWDC) starts next Monday.
- The tech giant is expected to introduce significantly upgraded MacBook Pro, MacBook Air, and iMac with new chipsets.
- Plans for upgrades to Apple’s operating systems are also expected to be outlined.
- Lastly, consumers and investors will have a key focus on privacy settings. Apple has been making impactful strides towards allowing users to see what data is being collected on an app-by-app basis.
- This transparency is causing an ongoing battle between Apple and Facebook, as the last iOS update has significantly hindered Facebook’s data collection ability.
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