Market Froth Is Getting Extreme. Just Look at Meme Stocks.
When there’s a lot of money sloshing around the economy, it’s easy for new ideas to attract speculative money—and some of those ideas are just dumb
By James Mackintosh, The Wall Street Journal, May 17, 2024
… wild meme-stock price gains [in the past couple of weeks] are a symptom of easy money that’s propping up the entire market…the idea that easy money is supporting the market, is plausible and well worth worrying about…
The rise of meme stocks in early 2021 came amid stock-market froth, with bubbles in SPACs, cannabis stocks, lossmaking tech, and solar and wind-related companies. They shared a common driver: Too much money in the economy had to go somewhere, and it went into stocks. Easy money was the driver of many past bubbles, too, and might again be propping up the stock market…
The S&P 500’s back at a record high, and has rarely been valued so highly by price to forward earnings and other measures.
When there’s a lot of money sloshing around the economy, it’s easy for new ideas to attract speculative money—and some of those ideas are just dumb. Maybe rates should be higher still. [end quote]
The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems. This is a measure of how much money is sloshing around the financial system.
Currently, financial conditions are very loose and getting even looser. The National Financial Conditions Index (NFCI) is almost as loose as it was in 2021 when the fed funds rate was zero and Congress was handing out trillions of dollars in Covid-related stimulus. I don’t know why financial conditions are so loose now but they are. The loose money is supporting rising stock, bond and commodity prices.
The markets have recovered from their latest temporary disappointment that the Federal Reserve won’t cut the fed funds rate soon. Reported CPI declined by a tenth of a percent but that could be noise.
The S&P 500 hit a record. The DJIA broke 40,000 for the first time. CAPE is rising and is in bubble territory.
The trade is risk-on as stocks and junk bonds are rising faster than Treasuries. Treasury yields fell a little last week. The Treasury yield curve is almost flat.
The Fear & Greed Index is in Greed. Gold, silver, copper and natgas prices are rising. Oil fell a little.
There are no new black swans on the horizon.
The METAR for next week is sunny. Market bubbles can burst unexpectedly but I don’t see any needles appearing in the next week.
Wendy