Stocks started off strong yesterday but a sharp selloff in the last half hour sent all major averages into the red for the session. The highlights, if that’s the right word, were the volatile movements in Trump Media & Technology Group, the parent of the Truth Social network, and the surge in Reddit, another social media name that was the key platform for the meme stocks that started a retail speculative craze back in 2020 and 2021.
Reddit, looked at in isolation, would seem to be more than fully valued. It has never made money and attracts an audience most major advertisers find unappealing. But with speculative fever rising and stocks setting 20 new highs already within the first three months, euphoria, at least in parts of the market, is setting in.
But Reddit would seem to be a value stock compared to Trump Media & Technology Group. This company came public this week through a merger with a SPAC. You remember them. SPAC stands for special purpose acquisition corporation. It’s a blind pool that raises money with the hope of taking the part of monies raised that don’t stuff the pockets of promoters and buying a company that will soar in value. SPACs rose to prominence in 2020 and 2021 raising well over $100 billion in money. Some found nothing to buy and returned most of the cash to its original investors. Those were the lucky ones. SPACs that found something seemingly attractive to buy didn’t succeed very often. Many went bankrupt. Over 80% sell below their offering prices. New SPACs hardly surfaced in 2022 or 2023.
Digital World Acquisition Corp., the SPAC that ultimately invested in Trump Media, has been pursuing that buy for several years. Along the way, it got fined for financial irregularities but ultimately got the green light to proceed. At its peak yesterday, the company had a net worth of over $8 billion. Revenues are less than $10 million. Mainstream advertisers are unlikely to want to advertise on a platform as controversial as Truth Social. The risks here are obvious aside from valuation. You don’t need my help to list them. As for valuation, anything that sells for more than 10x revenues is considered rich. Trump Media sells for over 800x revenues.
None of this means the stock can’t double or triple over the short term. We saw that three years ago when names like GameStop, AMC Theatres, and Bed, Bath & Beyond soared before ultimately coming to earth. Bed, Bath & Beyond went to the graveyard. In investing history, three years is a short-time. You would think lessons learned would be retained over such a short span. The Trump Media and Reddit stories are different. Yet at the same time, they are identical. Valuations are illogical and neither may ever make a dime.
I don’t want to dwell on these stories other than to make the point that speculative fever isn’t calming down. Bitcoin is back over $70,000. There’s plenty of money out there to support euphoria for some time. No one, including us, can tell you when the fever will break.
Many, if not most, pundits may argue that the euphoria is isolated and therefore largely irrelevant to the rest of the market. Valuations may be a little high but nowhere near as high as in 1999 or 2000. True. We just lived through the worst bout of inflation since the 1970s. It never approached levels from that period. But that doesn’t mean it wasn’t painful. We don’t need to reach to levels of absurdity of the late 90s to set the table for some kind of sober correction.
I don’t want to be overdramatic. As long as the economy is able to grow, any correction will likely be both healthy and moderate. But let’s look at the facts. Stocks are up 20%+ since the end of October and, excluding the half dozen denizens of the top of the S&P 500, the rest have shown no earnings growth over the interim. The entire gain results for high P/Es. For most of this year, 10-year Treasury yields have hovered between 4.0% and 4.3%. The gains so far this year are not earnings related and they are not interest rate related. They are momentum related reflecting an internal energy that has led to 20 new highs in less than 3 months.
But where might a correction come from? Earnings aren’t great, but they are good. There are lots of pockets of strength within the economy. Record highs in German and Japanese markets suggest worldwide strength. Government is in gridlock but at least it’s still running.
But there are clouds. Retailers have stumbled a bit of late. Shippers like Fedex# and UPS# warn that growth this year will be tough to achieve. If they are telling us they will be shipping fewer boxes, that can’t be good. Sales of existing homes are in a slump.
Thus, it’s an economic mixed bag combined with rising investor enthusiasm. That’s a good combination as long as it lasts. The markets strength is pushing market strategists to raise target prices and 2024 earnings estimates. I can’t speak to price targets other than to say that few want to yell the sky in falling in a bull market. As for rising earnings forecasts, that is totally dependent on a soft landing and economic acceleration as the year progresses. It probably assumes three Fed Funds rate cuts before year end. It presumes inflation will fall to the Fed’s 2% target within a year or so. All that may happen. But it is also possible that services inflation will stay hot enough to defer rate cuts, that the unemployment rate may rise above 4%, and even, maybe, that elusive recession might happen. Those aren’t predictions on my part, at least not yet. But they are real possibilities that markets today are dismissing. The CPI reports for January and February have been a bit hotter than expected. Most expect that to change as soon as March. We’ll see.
I wouldn’t race to sell stocks in bulk here. But I would pay attention to valuation. Stocks aren’t cheap. There are few bargains today. Nibbling at favorites is fine. Sticking a toe in the water is a lot different that diving into a pool without knowing the depth of the water. Stock buybacks are going to stop soon if only for a few weeks and perhaps the nonsense of the current generation of meme stocks will dissipate, if only for a while, allowing a better buying opportunity in the weeks ahead.
Today, Mariah Carey is 55. Quentin Tarantino is 61.
James M. Meyer, CFA 610-260-2220