US stockmarket bubble has started to deflate

“Sanity” is making a “tentative return” to the market, says Robin Wigglesworth in the Financial Times. Stocks have so far shrugged off hints that we are heading for tighter monetary policy, but frothier corners of the market are finally starting to deflate. 

Many of this year’s “most heinously silly trades” have come undone in recent weeks. Take the flagship fund at Ark Invest, run by fund manager and noted bitcoin bull Cathie Wood. Its big bets on artificial intelligence and genomics helped it gain almost 150% in 2020, but it is down by more than 21% this year. A Goldman Sachs index of unprofitable US tech stocks is down “more than a fifth” over the past month. 

Investors buy unprofitable tech stocks because they hope to make money in the future, but higher interest rates prompt some to sell and put their cash into assets that make returns today instead. There have been few things sillier in 2021 than the rise of the “meme stock”. Ordinary “retail investors” have been co-ordinating on the internet forum Reddit to drive up the price of certain stocks. 

There is little rhyme or reason to which stocks become fashionable, beyond a desire to bet against Wall Street hedge funds and vague childhood nostalgia for bricks and mortar video game retailers (GameStop) or struggling cinema chains (AMC Entertainment). GameStop shares surged by as much as 2,700% earlier this year, but on Monday they tumbled to their lowest close since March, says Janet Cho in Barron’s. 

Cryptocurrencies, another big winner of the 2021 market madness, are also coming under pressure. Bitcoin has been trading as low as $46,462 this week, down more than 30% since last month’s all-time high. Ether, another cryptocurrency, has fallen 20% over the same period.