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- Meme stocks have climbed higher in 2023 as part of a broader rally.
- A fund that tracks retail traders' favorites has jumped 60% year-to-date, and recently hit a one-year high.
- It's a sign investors are picking stocks based on "animal spirits", which could be bad news for the market.
Meme stocks are back, and that should be a warning sign to investors that this year's surprising rally might not last.
The asset class – beloved by posters on Reddit's Wall Street Bets investing forum, even though it's made up of companies that are either unprofitable or riddled with debt – has staged a comeback since the start of 2023.
Roundhill's MEME ETF – a fund launched in 2021 to track some of the market's most speculative names – hit a one-year high Thursday and has jumped around 60% year-to-date. The benchmark S&P 500 index is up 17% over the same period.
Meanwhile, much-maligned stocks like Carvana, Marathon Digital, and Riot Platforms have all racked up staggering gains between 500% and 700% in 2023, while other Wall Street Bets favorites like GameStop and AMC Entertainment have also edged higher this year.
But the meme-stock resurgence should be raising red flags for even the most bullish of strategists.
In January 2021, Wall Street Bets users piled into GameStop, sending the retailer's stock price soaring a staggering 3,000% in the space of a month and fueling massive losses for hedge funds that had shorted it.
Shares in AMC, BlackBerry, and the now-delisted Bed Bath & Beyond also enjoyed huge rallies the same month.
With the benefit of hindsight, that meme-stock madness marked the tail-end of years of steady stock-market gains – because just over a year later the Federal Reserve started aggressively raising interest rates, popping the "everything bubble" and plunging equities into a bear market.
BTIG's Jonathan Krinsky said last week that history could be about to repeat itself, pointing out that the benchmark S&P 500 tends to fall when the gap in performance between meme stocks and the consumer staples sector widens to over 10 percentage points.
(When his research note was published last Tuesday, MEME had jumped 10% in the space of three trading sessions, with SPDR's Consumer Staples Select Sector Fund down 1.3% over the same period.)
Meanwhile, DataTrek Research co-founder Jessica Rabe said meme stocks' recent gains signaled the return of "animal spirits", using a term that the economist John Maynard Keynes coined that term in 1936 to refer to when people start making financial decisions based on emotion, rather than logic.
Any rally based on FOMO, rather than fundamentals, is unlikely to last – and many of Wall Street's top banks are already warning that the S&P 500 is unlikely to keep racking up massive gains the rest of the year.
So it might be time for investors to start worrying – because while meme stocks' gains are a boost for Reddit day traders, they tend to be bad news for everyone else.