One of last year’s most dramatic market stories was how a bunch of individuals from the WallStreetBets forum joined forces to take on the Wall Street Giants, triggering spectacular moves on previously ailing stocks. With the growth of retail investors showing no sign of slowing, where will this year’s sensations come from?
In early 2021, the Reddit social subplatform, WallStreetBets, took the media by storm and moved markets, rallying traders to put their money behind heavily shorted stocks like GameStop and AMC, initiating the notorious GameStop short squeeze. But as awareness of the forum grew, its appeal waned leaving investors to ask where could the money of 2022 flow? Will it be Non-Fungible Tokens? Cryptocurrencies? Or will individual stocks still find favour?
First, let’s look back on the environment within which WallStreetBets and the so-called “meme stocks” sparked such a sensation. From March 2020, governments across the world closed down economic and social activities to try and stem the spread of coronavirus. Starved of the furlough schemes supporting incomes and with pubs and restaurants closed and holidays not allowed, attention instead turned to equity markets.
“Lockdown created a perfect storm of people having extra cash and more time on their hands as well as the emergence of trading platforms such as Robinhood and Capital.com,’’ said Tarik Chebib, Capital.com’s Chief Revenue Officer.
New Tribes
These new entrants to the markets sought out tips and expertise on where to place their money. And this is where online forums such as Reddit’s WallStreetBets came to the fore with individuals more likely to invest based on recommendations from people they considered to be like-minded with Reddit creating new tribes of communities who all shared similar interests.
“Before Reddit, it was hard for retail investors to get information in time before the institutional investors had already reacted but that started to change with social forums like WallStreetBets,’’ Chebib said. “There’s only one reason why people turned to these online communities and that’s to try and find an edge and make money.”
However, how successful these communities have been in making money for their followers is doubtful. Analysts at Capital.com looked at the top five most mentioned stocks of 2021 on WallStreetBets and analysed how they performed after they were first mentioned on the platform.
Negative Returns
Except for a crazy few weeks in January when the meme stocks were making headlines, investing in the meme stocks that followed would have seen you lose money. The WallStreetBets’ approach was to make a quick buck rather than buying and holding them for the long term or looking at the fundamentals of the stock and this is reflected in the returns of these same stocks. The best returns were to be had within the first three to seven days after they were mentioned with the majority of stocks giving negative returns with the long-term returns worse than a simple S&P 500 tracker, according to Capital.com’s analysis.
In this context, it is perhaps no surprise that interest in WallStreetBets has waned. However, this community-focused approach to investing doesn’t seem to have faded. Instead, retail investors appear to be turning to other social media outlets with Chebib naming Twitter and Discord as the two main platforms according to clients for the current wave of investing, both of which fit “perfectly around community.”
As well as the source of information for the latest stock recommendations changing, the trading environment itself is also altering. After almost two years of gains for stock markets as equities bounced back strongly from the initial COVID-induced crash of March 2020, central banks have started to reduce the flow of money into economies with interest rates likely to be hiked as runaway inflation becomes the dominant threat.
“For the last two years, bullish investors would generally have been rewarded by investing in the stock market, which rallied across the board, but it looks like it might be much more challenging this year,” said David Jones, Capital.com’s Chief Market Strategist.
Harder to Make Money
After such a sustained bullish environment, lots of company valuations have started to look expensive, raising the spectre of an imminent sell-off with the high volatility already experienced so far in 2022 likely to remain for the year. In particular, the tech stocks that have been the darlings of equity markets for the last few years now look under threat.
“But then again, it could pay dividends to be more defensive,’’ Jones said. “For the savvy investor, volatility brings potential opportunity while for the more naïve it may be a harder year, particularly for those who don’t pay attention to risk management,” adding that simple ways of reducing your risk is to only invest what you can afford to lose, to manage your stops and to spread your risk rather than put all your money on the next “hot thing”.
However, on the topic of the time-worn favourite hedge against inflation, gold, Jones sounded a cautionary note. The precious metal hasn’t rallied thus far despite all the concerns over inflation so those pinning their hopes on 2022 being gold’s year may yet be disappointed.
2022’s Best Opportunities
So where to look for the trending themes of this year? Although the past is no reliable guarantee of the future, if we look at the last quarter of 2021 as a guide then commodities are likely to remain the focus of attention but as well as this oldest of sectors some of the newest entrants may well feature heavily too, according to Chebib.
“NFTs are not going away and although we’re going through a crypto winter currently with the prices dropping, it’s just a matter of time before it pops again,” said Chebib, adding that equities of the companies involved in the metaverse may also prove popular.
Tips from fellow members of your tribe on these forums are likely to continue having a role in a world consumed by social media forums and online communities. The question then remains: is it really the best source of investment advice - based on the evidence? Perhaps not.
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The article contains market commentary information, it should not be regarded as investment research or investment advice. Past performance is not a reliable indicator for the future.