GameStop (GME) - Get GameStop Corporation Report stock closed the May 4 trading session up more than 5% after the markets reacted positively to the monetary policy announcements of the day. The Federal Reserve increased rates by 50 basis points to contain the highest inflation levels in 40 years.
Could the Fed's decision be the spark that sends GameStop stock much higher from here?
(Read more from Wall Street Memes: Why Aterian Is the Top Short-Squeeze Stock Pick for May)
A sense of relief in the markets
The market reacted positively to the Federal Reserve's monetary policy decision. The 50-basis point interest rate hike was just what the market had been expecting.
While raising short-term rates, Jerome Powell also showed his dovish side. He effectively ruled out the possibility of a 75-basis point bump in the next meeting, despite making it clear that another 50-basis point increase is certainly on the table.
The Fed moving more carefully with monetary tightening might be a sign that inflation can be fought without heavy central bank intervention that otherwise could, at worst, cause a recession in the near future.
GME trades in line with the broad market
In a soft macroeconomic scenario, even GameStop stock could hurt — despite shares often trading at odds with the company’s and the economy’s fundamentals. So far this year, GME’s performance has been very much in line with broad market trends.
GameStop shares jumped just over 5% during the May 4 trading season. The S&P 500 closed the same day up almost 3%. Year-to-date, GameStop stock trades almost 15% lower, while the S&P 500 is nearly 10% underwater.
In mid-March, GameStop and other meme stocks experienced their most recent rally. The run was fueled by specific catalysts, including the purchase of shares by insiders (think GameStop chair Ryan Cohen as a key example) and the announcement of stock splits.
The problem is that, when FOMO (fear of missing out) sentiment loses steam as it did last month, GME stock tends to correct and, once again, follow in the footsteps of the broad market.
The case of whether GameStop can rally after the Fed’s decision is, ultimately, dependent on what happens to investor and trader sentiment. It has been a tough year for GameStop stock, and many investors may be waiting for a more constructive market landscape to jump in.
An initial recovery in GME stock could incentivize would-be bulls to come off the sidelines. Bullishness could lead to FOMO, heavy trading volumes and eventual short squeezes. We are all very familiar with this story, one that has made GME longs quite a bit of money in the past.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)