In this weeks market review, we’ll provide an overview of the current state of the financial markets. We’ll show that now is an opportune time for the style factor Value. Read down to where we ask the big question "Is the meme stock dead?" and investigate the mania of meme stocks. You can visit last weeks market review here.
Let's begin with a look at notable performances over the past week.
Last week, the stock market experienced a significant wobble with the S&P 500 (SPY), Nasdaq-100 (QQQ), Russell 2000 (IWM), and the Dow Jones Industrial Average (DIA) all recording losses of nearly -3%. This was the worst week of the year for the S&P 500, Nasdaq, and the Dow. While the S&P 500, Nasdaq-100 and the small-cap Russell 2000 are still positive in 2023, they have retraced almost 50% of their January gains. The Dow has fallen into negative territory.
Every sector was negative for the week. Transportation was the best performer, suffering only half a percentage point decline. Technology Services sector posting the largest loss of over 4%.
Seasonality charts can be used to identify patterns or trends in a stocks performance during specific times of the year. We've plotted the average monthly S&P 500 return over the past 17 years. Historically, March has been a positive month for the S&P 500, returning 1.5% on average. Will we see the trend continue in 2023?
Value investing has been shown to deliver strong returns over the long run, as value investors are able to identify and invest in undervalued or cheap companies that eventually outperform the market. With that being said, value has largely underperformed over the past decade and many investors have been quick to proclaim its demise, a quick Google search will yield hundreds of articles claiming as much. We have conducted an analysis on the spread of value in relation to the Price to Book (P/B) ratio. Additionally, we have charted the performance of a long/short value portfolio created by Fama-French.
The value spread is determined by calculating the average P/B ratio of the top decile (most expensive stocks) and dividing it by the bottom decile (cheapest stocks). A high value spread indicates strong potential for value investors, while a low spread suggests the opposite. When the value spread declines, long/short value portfolios perform well. In February 2021, the value spread reached its peak and has since decreased significantly. During this period, the Fama-French value factor (High Minus Low) produced a return of over 50%.
The spread is still very wide, at the 80th percentile, and a narrowing of this value will return even greater gains. A similar phenomenon can be observed with a long-only value strategy, we’ve built one here if you’d like to check out how it performed.
The meme stock craze of the past few years has been one of the most captivating phenomenons to observe. In case you happened to miss it, in 2021 and 2022, a group of individual investors on Reddit's WallStreetBets and Twitter coordinated buying certain stocks that were heavily shorted by institutional investors. The most prominent meme stocks include GameStop, AMC Entertainment, BlackBerry, Nokia, and Bed Bath & Beyond.
To assess its performance, we created a portfolio of the top 10 most popular meme stocks starting in January 2021. Within a few months, the portfolio generated spectacular returns, almost quintupling by July 2021. However, it has since experienced a lengthy and painful drawdown of over 60%.
Buying meme stocks is not a clever investment strategy. They are highly volatile and lack solid fundamentals. Many investors will not be able to stomach either the volatility or the drawdowns associated with meme stocks. A systematic approach with solid diversification is the best for any successful retail investor.
Similarly, shorting meme stocks is ill-advised, the hype and speculation can drive up prices and create short squeezes. Some sophisticated institutional investors suffered huge losses shorting meme stocks.
Last week was another volatile week for cryptocurrencies, Bitcoin had it’s worst week of 2023, falling 5.5% after hitting a 6-month high of over $25,000 on February 21. Ethereum, Binance Coin, Polkadot, and Ripple all experienced large declines also, varying from -2.4 to -9.3%.
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