The Fed's escalating inflation fight is taking the last bit of air out of meme-stock-style speculation, trading expert says

The Fed's escalating inflation fight is taking the last bit of air out of meme-stock-style speculation, trading expert says
REUTERS/Brendan McDermid
  • The Fed's inflation fight spells the final end of the meme-trading bubble this cycle, an expert said.
  • The CEO of Tradier told Insider that the end result will ultimately be a healthier market.

The meme-trading bubble is likely finally over, and the nail in the coffin is the Federal Reserve's ramping up of its inflation fight as another large rate hike awaits markets at the end of this month.

Already this year, retail investors have fled meme stocks and many cryptocurrencies as the large speculative bubble that's blown up around markets over the last two years is deflated by the end of easy money and the Fed's hawkish pivot.

The Roundhill Meme ETF, which tracks a basket of meme stocks, (defined as exhibiting "a combination of elevated social media activity and high short interest") has vastly underperformed the wider market, falling more than 50% year-to-date.

The VanEck Social Sentiment ETF — ticker BUZZ — which invests in stocks generating strong engagement on news and social media, is also down big, slumping about 40% this year.

But those kinds of losses can be interpreted as a sign that there is some return to fundamentals being seen in the market, and some of the most inexperienced traders propping up shares of otherwise struggling companies are exiting.


And while some lament the impact of the Fed's inflation fight on the stock market, the result of washing out the most speculative assets can only be seen as a positive outcome, Dan Raju, CEO of Tradier, told Insider.

"It creates an amazing opportunity for the expert traders to come in and dominate," Raju said. "We went through a phase of almost 24 months where public market valuations and private market valuations [had] no strong fundamentals behind them," Raju said. "I think this correction will be healthy for the market."

The Fed's maneuvering has dampened the outlook for stocks and the economy quite a bit. Bank of America estimated the S&P 500 will end 2022 at 3600, and that a recession is coming this year.

"This general sentiment we see among traders right now, it is very, very negative," Raju said, pointing to June's CPI reading that showed the highest inflation in 41 years. "The Fed right now has got only one goal, and that is to bring the damn inflation down."

Raju predicts that the central bank will pursue at least two more aggressive rate hikes, as much as a 100 basis points at the next meeting and potentially a 75 basis point hike after that, which could mean more pain for stocks, especially if recession expectations jump again in response.


For now though, tighter monetary policy likely means an end to this cycle's meme-stock trading bubble, at least until inflation is more firmly under control, Raju said. And that could take a while, promising more volatility and a further shaking out of speculative assets as the economy and markets adjust to new conditions.