U.S. stocks suffered their biggest one-day percentage drop in three months on Wednesday, followed by a modest bounce back on Thursday and then further sell off on Friday. This is despite the central bank keeping overnight interest rates near zero and making no change to its monthly bond purchases, as was widely expected, and pledged to keep that support intact until a full economic rebound is in place.

In the meantime, shares of video game retailer GameStop Corp and movie theater operator AMC Entertainment Holdings each more than doubled on Wednesday, continuing a torrid run higher over the past week, as amateur investors again piled into the stocks, forcing short-sellers such as Citron and Melvin to abandon their losing bets. The volatility in these companies had individual investors claiming victory over hedge funds although there are sure to be several individual investors who lost their shirts along with the hedge funds.

Elsewhere, recent reports on U.S. economic activity came in better than expected, pointing to a tentative improvement in the economic landscape as investors await widespread vaccinations and lasting business reopenings. Weekly unemployment claims dipped below 900,000 for the first time in three weeks, albeit while remaining at a historically elevated level. And on Friday, new data showed that personal income rose more than expected in December, while consumer spending ticked down less than feared.

Future Wealth’s View

It has been a while since we had a wild ride on Wall Street and, this time around, the reasons for the massive volatility are largely unfounded. Individual investors using social media such as Reddit to tout their stock picks is nothing new. Before advent of social media, it used to be message boards. But, getting attention from the SEC and Wall Street Journal, which published the story in its front page on Friday, is a rare occurrence. What is concerning is the demographic of these individual investors – painter, waitress, high school teacher and a taxi driver, are few of the many  individual investors who have claimed to have made thousands of dollars trading these thinly traded borderline bankrupt companies.

This is very wrong in many ways, not to mention being ill-advised for any investor without a sufficient bankroll. In a TV interview on Friday, I commented on this phenomenon of pump and dump schemes being a losing game. Link is here – https://www.texomashomepage.com/what-the-tech/what-the-tech-social-media-and-the-stock-market/.

Once again, Wall Street has put a host of investors into a test of the greater fool theory. And as always, a few greedy ones cashed out but there are going to be plethora of people who are going to be licking their wounds when the dust settles.