By Jack Kelly
A strange thing happened over the pandemic—people fell in love with the stock market. In the past, most Americans believed that buying stocks and bonds was exclusively for the rich. It was too complicated, scary and risky. They may have owned securities in their company’s 401(k) retirement plan and, perhaps, an IRA account; otherwise, the vast majority of people stayed away from Wall Street.
This has all changed. We’ve seen a boom in trading activities. Social media inspired young people to start day trading on Robinhood. The WallStreetBets Reddit forum grew to over 9 million members. Their collective recommendations of stocks created huge spikes in the prices of their favorite “meme stonks.” They took on established hedge funds in a sophisticated move to profit from their short-selling activities. It woke Americans up to the fact that anyone could get involved with the stock market, make money and build wealth for themselves.
Some say that this new attraction is due to “FOMO”—the fear of missing out. In addition to Reddit, Tik Tok, Instagram and Twitter are overrun by newly minted investment experts touting Bitcoin or pennystocks.
Bloomberg reports, “The affection underscores growing confidence in an economic recovery, buttressed by government support and vaccines.” It has emboldened people to start trading stocks. Bloomberg has some concerns, “While aspects of the craze—the growing obsession with penny stocks and options, primarily—are the basis for daily warnings about a bubble,” which could epically burst. The S&P, a bellwether gauge of the stock market, skyrocketed up 75% from the March 2020 lows.
The P/E ratio, which calculates the price to earnings, a metric for valuing the price of a stock, is at about record highs. This means that many stocks look as if they’re priced for perfection and are seemingly overvalued. It could take one small black swan event to bring things back to a reasonable level. Historically, stocks never go straight up. There are usually 5% to 15% corrections that cools down the market and brings it back to some sort of reasonableness. This hasn’t happened yet. The bigger the bubble, the uglier the burst.
Some say that this time is different. With trillions of dollars being pumped into the stock market, there is talk of inflation rising. Stocks do well with inflation, so buying them serves as a hedge against it. Inventors don’t have many alternatives to put their money to work. Bank savings accounts pay nearly nothing.
Ominously, Michael Burry, the hedge fund manager who made a fortune shorting the stock market before the financial crisis and featured in the movie The Big Short, played by Christian Bale, warned that we’re in for a fall. He pinned a tweet, stating, “People say I didn’t warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned.”
It will be interesting to see how this all plays out. What do you think?