One expert says the meme stock craze and rising inflation could cause a deep sell-off this summer. Here’s why.
The S&P 500 closed at a new all-time high on Thursday as investors shrugged off higher-than-expected consumer price inflation as “transitory.”
The Labor Department said the consumer price index—which represents a basket including food, energy, groceries, housing costs, as well as sales across a spectrum of goods—rose 5% year-over-year in May, the fastest pace in nearly 13 years.
Investors weren’t spooked. One clue aside from the S&P: the 10-year Treasury yield, which often rises with inflation, fell to 1.45% – well below its recent high of 1.75%.
“The strength in the top line indices was driven largely by categories that have been heavily disrupted by COVID and remain under pressure from supply chain disruptions,” wrote Eric Wingorad, senior economist at Alliance Bernstein. “The more persistent categories of inflation — the ones that do a better job of capturing the sustainable trend—are significantly more subdued. That means that the details of today’s print continue to support the idea that the spike in inflation is transitory, even if it is more intense than most forecasters (myself included) would originally have anticipated.”
Still, “figures like today’s CPI will certainly be raising eyebrow at the Fed,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “The bottom line is they will likely need additional evidence to determine whether upward inflation pressures will be more persistent.”
Beyond the CPI, BTIG’s Julian Emanuel is more worried about Core PCE, a key gauge closely monitored by the Fed, which grew at a faster-than-expected 3.1% in April.
“Any time that number has risen above 2%, the average monthly return for those periods is -1.6% [for the S&P 500],” Emanuel, BTIG’s chief equity and derivatives strategist, said. “You couple that with the fact we’ve had the lowest bearish reading in the [AAII] sentiment survey this past week, not seen since the beginning of 2018, just before the Armageddon episode, [and] we think there’s a recipe for a pullback within the longer-term uptrend right in front of us.”
But inflation isn’t the only thing that could spark a pullback this summer. Emanuel argues the Reddit-fueled meme stock frenzy could play a role in a deep sell-off.
Emanuel pointed to January, when meme stocks like GameStop (NYSE: GME) first spiked higher. Weeks later, the major indexes went for a wild ride a retail traders took profits.
“We all know the video game retailer really [lead] the charge at that time,” Emanuel said. “Essentially, it precipitated a month or two of sort of violently sideways to lower activity in the broad market as speculation came off.”
The meme stock trade kicked-off again last week, with names like AMC Entertainment (NYSE: AMC), Clover Health (NASDAQ: CLOV), ContextLogic (NASDAQ: WISH), Clean Energy Fuels (NASDAQ: CLNE), and Wendy’s (NASDAQ: WEN) all surging higher on any given day since then.
Even with different names fueling the meme stock craze, Emanuel believes that the Reddit frenzy combined with rising inflation means the fallout this time could be more serious than what was seen back in February.
“We’ve got some yellow caution flags up,” Emanuel concluded.