Last year, meme-stock trading was the hot new thing, as many novice investors took their cues from Reddit’s WallStreetBets chat room and drove speculative stocks like GameStop (GME) - Get GameStop Corp. Class A Report and AMC Entertainment (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report higher.
But this year, the party is crashing, as rising interest rates have put the kibosh on risk assets. The stock of videogame retailer GameStop has dropped 36% in the past month and movie-theater chain AMC has lost 42%.
A basket of 37 meme stocks tracked by Bloomberg has slid 15% in just the past week. The VanEck Social Sentiment ETF (BUZZ) - Get VanEck Social Sentiment ETF Report, which tracks stocks that receive attention on social media, has given up 20% this year.
WallStreetBets was the place to be last year, with its membership quintupling to more than 11 million now from less than two million at the beginning of 2021, according to The Wall Street Journal.
But now that meme stocks have hit the skids, WallStreetBets has lost its cache. On an average day last November, the site had about 27,000 comments on its main page, down from about 47,000 a year ago according to The Journal’s analysis of data from TopStonks, which tracks stocks mentioned on websites.
Rookie investors have discovered that making money isn’t so easy when the stock market falls, and many have gotten discouraged.
Retail traders now account for about 18% of market volume, down from 24% in the first quarter of 2021, according to Bloomberg Intelligence.
“Most retail investors don’t know how to trade this market,” Larry Tabb, head of market structure research at Bloomberg Intelligence, told Bloomberg News.
“They buy — price goes up, they sell and buy again. But when the market falls, they aren’t sure how to short, don’t understand options and when they buy and lose, they tend to think prices will rebound so they hold on, instead of selling out.”
There may be a silver lining to this. The plunge of meme stocks may lead novice investors to more conservative choices.
For instance, interest-rate hikes by the Federal Reserve might push these investors to bonds, JJ Kinahan, chief market strategist at TD Ameritrade, told Bloomberg.
“These are people who can start to understand the different products that they can choose for their own financial futures,” Kinahan said. “The market is constantly changing, and this is one more way.”