2022 Stock Market Outlook: 2021 Fads And Fashions Are Forgotten

The 2021 stock market is finalizing its lessons that will put the 2022 stock market and investors in a different place and on a different footing.

What’s happening is the big three 2021 fads and fashions are being laid to rest:

1. Meme stock mania is dissipating as the weak realities drag down the social-media-hyped story-stocks
2. Special Purpose Acquisition Company (SPAC) IPOs are dwindling as investors now see that “special” means a financial contrivance that rewarded its insider “sponsors” and left investors out in the cold
3. Biotech IPOs: Covid-19 spurred the investor interest in new healthcare innovators. Biotechnologies negative reality has diminished that interest

Here is how the now-harsh realities have taken over:

Meme stocks

Start with the media’s peak favoritism in July.

From my July article, “The Meme Stock Movement Is Imploding – Don’t Be The Last One Out” –

“Barron’s and Fortune published articles praising the meme stock investing approach. They are important contrarian indicators. All their examples of what went right are collapsing now.

“Fortune published ‘What will be the next big meme stock? Chatter on Reddit’s WallStreetBets offers hints’ on June 28. Barron’s just published (July 12), ‘Meme Stock Trade Far From Over,’ and it is an especially important contrarian indicator. The cover title, atop a drawing of rocket ships with meme stock symbols, is ‘Meme Stocks Defy Gravity – The boom in retail day-trading persists as Wall Street struggles to respond.’ Turn to the story and the additional headline gushes: ‘The Market’s MEME Generation – A half-year later, a youthful retail day-trading boom is showing signs that it has staying power.’ Except that 6-month description is actually only a few days (or hours) of rocket ignition when the stock charts are examined.”

Since then, those stocks have fallen (imploded) further. The first table is from my July 13 article, and the second is the current version (December 21):

Note #1: GameStop

GME
and AMC

AMC
Entertainment, while down, still show large 2021 gains to date (GME = 734% and AMC = 1300%). That’s because management wisely sided with the Reddit-social group, seemingly supporting the notion of great things to come. As a result, each was able to raise large amounts of capital through sales of new shares in the second quarter. CNBC provided a good overview of the Reddit-social group temperament at the time of AMC’s second offering. Nevertheless, the stocks now are well below their June offering prices: AMC by (39)% and GME by (30)%.

Note #2: Large negative returns tend to disguise the enormity of the shrinkage, particularly when we see comparisons with larger positives. For example, AMC is up 1300% year-to-date and is down (57)% from its high. The problem is ups are measured from their low points, and downs from their high points. One solution is to convert the down to the up required to regain the loss. AMC’s (57)% down is equivalent to 133% up. The last column in the second table above shows AMC is in the best position of the ten Meme stocks. Another solution is to use the same base as the positive return. In that case, AMC’s (57)% down reduced the year-to-date return to 1300% from its high of 3300% – a full return loss of (2000)%.

SPAC stocks

“Whadda you mean, ‘sponsors’ get 20% of the deal for peanuts?” Yes, it was all explained in the lengthy prospectus, albeit in arcane legalese – gobbledygook that meant you’re not getting into a hot deal on the ground floor. Instead, you’re paying top dollar for a financial contrivance built to reward the creators (AKA, “sponsors”).  

Because the sponsors’ cost for 20% of the deal is minuscule, their gains are huge compared to the 80%, $10-cost investors. (Said another way, the sponsors can bail out at $1 and still make good money, even as the investors lose 90%.) What this means is that the sponsors’ main concern is completing a deal (any deal) before the clock strikes midnight, the magic construct collapses and they must give investors their money back. Therefore, the quality of the acquisition and the terms of the deal are secondary concerns.

The 2021 results have revealed the reality, so most SPACs have returned to very near $10. Some institutional funds have taken to buying shares whenever they are below $10, then earning the difference when a deal happens and, if there isn’t a pop up on the news, they can exercise the one shareholder benefit: Redemption at $10 just prior to consummation of the deal.

For more information and insight into SPACs, see, “The pros, cons and incentives behind the SPAC-craze sweeping markets.” (Schroders, March 31)

Biotech stocks

The problem with biotechs is that successful healthcare innovation is hard to come by. It’s costly, time-consuming and the outcome is uncertain. Moreover, there is no assurance that a successful development will result in a business that produces attractive revenue, cash flow and earnings growth.

After the early excitement, we now have the facts. The common 2021 result is a big bust. Huge price declines from exciting, but unsupportable highs. (For some biotechs, the excitement high was the offering price.) And now even the few “winners” are ending the year with disappointing downtrends. These two graphs show the dismal picture for all the biotech IPOs this year (some were SPAC deals).

Year-to-day performance shows ten of 78 were positive, with only five above the S&P 500. Even the “winners” are ending the year far below their 2021 high prices.

The bottom line – 2022 is going to be different

The 2022 unknown is what will drive the stock market, but count on it to be different.

Besides not seeing the three fads resurrected, there is a good chance that other types of fads will not be created. Reality is taking over the thought process at the Federal Reserve and the U.S. Government, as well as at organizations and by consumers. Investors are likely to follow suit.

Growth expectations through easy money and deficit spending (popular beliefs in the early 1970s that were disproven) are being replaced by conventional (realistic) expectations and actions. While healthy in the long run, the shift could upset the valuation cart in the near term. Certainly, things will be different.

Then, there is the huge concentration of stock investments in the S&P 500 Index. I backed into this issue in “Nasdaq Hidden Underperformance Reveals 2022 Stock Market Possibilities” (December 19). Could it be this “fad” is the cause of the overvaluation, overpriced labels that have accompanied the index’s steady rise? If so, 2022 could be very different: challenging and invigorating.