No Need for FOMO
Contributed by Doug Walters, Max Berkovich
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.
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.
Big Push
- 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
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