Why GameStop's Meme Stock Frenzy Was A Perfect Storm That Will Never Be Repeated

The 2021 meme-stock frenzy that saw the now infamous short squeeze of GameStop and AMC Entertainment was a moment in time that was the culmination of government stimulus packages, an engaged retail market recovering from a pandemic, and a flat-footed Wall Street. Today’s cost-of-living crisis means that it may be many years before we see anything close to the GME phenomenon. 

The rise of retail investors, dubbed ‘dumb money’ by their institutional counterparts, became engaged in stocks on a deeper level than we’ve ever seen in early 2021. 

According to data compiled by BNY Mellon, one retail equities brokerage saw a 300% increase in daily orders in Q1 2021 compared to Q1 2019, and the total number of shares traded across US equities exchanges reached 24.4 billion on January the 27th 2021 alone. 

Thanks to the coordination of retail investors using social platforms like Reddit, TikTok, and YouTube, certain stocks that resonated with investors, like video game store GameStop and cinema firm AMC Entertainment, were targeted en masse while hedge funds had opted to take up a short position in the companies. This led to a short squeeze that saw shares in GME soar 1,700%. 

The short squeeze cost one hedge fund, Melvin Capital, 55% of its wealth and subsequent liquidation one year later. 

Meme investing had sent shockwaves around Wall Street, and the Reddit group that drove the GameStop short squeeze, WallStreetBets, introduced a brand new approach to investing. 

“Now the little guys have the advantage,” declared WallStreetBets founder Jaime Rogozinski. But after months of mixed results, we’re yet to see orchestrated short squeezes on the same scale in subsequent years. So what’s changed?

Economic Headwinds And Lost Momentum

Life after the GameStop short squeeze has been difficult for many retail investors. While many stocks experienced strong price rallies throughout 2021, the challenging economic climate of 2022 has seen more sell-offs across old meme favorites. 

As GameStop’s GME price performance shows, the stock has consistently failed in recapturing its brief late January 2021 peak. Instead of building on momentum, we see progressively weaker shockwaves as the stock still holds some impressive growth over its pre-2020 prices. 

The case of AMC Entertainment AMC is more severe, which peaked later in the year before falling nearly 90% in comparison to its market position five years ago, long before even the short squeeze took place. 

At the time of writing, GME and AMC are 82% and 96.5% adrift from their peaks respectively, and are showing little sign of recovery. 

Rather than a loss of retail investor interest, this significant downturn for meme investments stems from a complete turnaround in economic fortunes for investors. 

As part of its commitment to aid individuals impacted by the COVID-19 pandemic, the US government provided a stimulus package that consisted of “Direct cash payments of up to $1,400 for individuals earning less than $75,000 a year, plus $1,400 per dependent” among other relief efforts.

This, coupled with widespread lockdowns on a global scale afforded more retail investors with the time and resources to become directly engaged with social groups, market research, and online brokerage platforms like Robinhood that had recently begun marketing itself as a ‘zero-commission’ exchange. 

The increased spending power for investors and consumers alike paved the way for high inflation rates that have impacted global markets throughout 2022 and 2023, which has seen interest rate hikes dispatched to control economies around the world. 

With this in mind, the world that prompted the rise of meme investing has become the architect of its downfall. 

With interest rates bringing the threat of a deep cost-of-living crisis and even recessions across some economies, retail investor spending power is simply too weak to generate momentum on a large enough scale to compete with institutional counterparts. 

Furthermore, Maxim Manturov, head of investment research at Freedom Finance Europe, is wary about the prospect of recovery for US investors. 

“Jerome Powell's speech at the Jackson Hole Symposium indicated a willingness to raise interest rates further to balance inflation and steer it towards the target threshold, but Powell noted that he would rely on incoming data on inflation and the broader economy,” Manturov explained. 

“In addition, JOLTS data on 29 August showed that US job openings fell more than expected to 8.83 million - a more than two-year low - providing fresh evidence that labor demand is slowing, providing a dovish effect for Fed policy in Q4.”

Such circumstances would mean that we’re left with either long-term high interest rates or the prospect of collapsing businesses. Neither is conducive to the pandemic recovery boom year of 2021. 

Meme Investment Patterns Emerging From Asia

Despite difficulties faced by Western investors in embracing meme stocks post-2021, we’ve seen evidence of similar patterns to the GameStop investment trends emerging in South Korea. 

While Korean meme investors are more focused on sustainability stocks than childhood favorites like video game stores and cinemas, price movements in electric vehicle (EV) battery stocks have spent the summer of 2023 surging due to retail investors collaborating on social media. 

Fronted by ‘Mr Batt-Man’, a self-styled stock tipster, stock prices for battery firms have been surging for companies like Ecorpro, Posco Future M, Ecorpro BM, and Posco, which have seen massive surges throughout the year in a more sustained manner than the rapid squeezes of GME and AMC. 

As Ecorpro’s 2023 performance alone shows, investors have pushed stock prices to peaks that surpass 1,000% in a timely reminder that a meme frenzy can still take place anywhere if the market conditions are right. 

However, Schroders’ Co-Head of Asian Equity Alternative Investments, Robin Parbrook is dismissive of the significant EV battery market movements. 

“We have no doubt this will end in tears,” Parbrook states. “Korean market turnover on several days in July was close to the highest in history (for the KOSDAQ index it has exceeded past highs), with 40-50% of the turnover concentrated in just four or five battery names. Intraday moves in battery stocks have also been wild and volatile.”

What’s Next For Memes?

The future of meme investing is unpredictable, and that’s the beauty of the movement that’s captured the imagination of retail investors across the world. 

However, we can be certain that it will be profoundly difficult to replicate the short squeeze of GameStop in such a spectacular way, and almost impossible during times of high inflation and interest rates. 

Wall Street has wised up to meme investors congregating on social media, and this will help hedge funds to avoid the fate of Melvin Capital. Social listening has become a core component of any clued-up market analyst and institutions will be more wary than ever of dismissing grassroots movements among investors. 

Despite this, meme investing has been an excellent way to keep younger generations engaged in stocks and shares, and this is largely positive for markets. While we may never see GameStop’s perfect storm occur again, ‘dumb money’ is certainly being taken seriously by Wall Street. 

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