The Casino Crowd Is Back Across Markets With Soft Echoes Of 2021

(Bloomberg) -- Three years since speculative fever engulfed the US investment landscape, thrill seeking is back in vogue — even before Jerome Powell & Co. take their foot off the monetary brake.

Bitcoin's resurrection above $60,000 is once again front-page news as meme coins rally anew. Gambling spirits go way beyond crypto, though. Demand for bullish stock options, another mainstay of the 2021 investing era, is booming. Pandemic superstars like Carvana Co. and Beyond Meat Inc. have surged — burning bears along the way. 

While not the province of small-fry traders, risky debt issued by Corporate America is on the up as the credit supercycle goes on. And with Big Tech darlings delivering on their earnings promise, major stock benchmarks just closed out the week at fresh records.

Sure, it's no GameStop Corp.-era insanity. But the broader point is this: The risk-taking impulse across assets is proving harder to kill than Wall Street's old guards had bargained for after the travails of 2022. 

No wonder Apollo Management Chief Economist Torsten Slok is sticking his neck out with a shock call that the Federal Reserve will have to refrain from cutting interest rates this year after all.

“The market's just fighting the Fed and winning right now,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, said in an interview. “There's still euphoria, even though the Fed is kind of pulling away the punch bowl.”

With fourth-quarter earnings season essentially wrapped up, the S&P 500 and the Nasdaq 100 scored another all-time high this week. A Goldman Sachs Group Inc. basket of the most-shorted stocks rose 9% this week, catching bears off guard. Retail favorites like Carvana and Beyond Meat scored a 76% and 61% gain in February. 

Mom and pop investors, who got hit in 2022's bear market and were mostly quiet last year, have been staging a comeback. Appetite among retail traders for bullish call options is near early-2022 levels, per JPMorgan Chase & Co. citing data on flows from options customers with fewer than 10 contracts.

“When this has happened in the past during post Covid, momentum tends to beget momentum until some clearing event,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets.

The fear of missing out has taken hold even as bond traders curb their expectations on monetary easing ahead to align closer to the Fed's projections of three interest-rate cuts this year.

It was a blockbuster week for Bitcoin. New exchange-traded funds investing in the digital currency have raked in billions combined since they first made their debut in January. BlackRock Inc.'s iShares Bitcoin Trust smashed one record after the next, now at $10 billion in just seven weeks. That's the fastest an ETF has ever hit such a milestone, according to Bloomberg Intelligence.

The mania wasn't limited to the world's biggest digital currency. Meme coins like Dogecoin, Shiba Inu and Pepe have enjoyed a meteoric rally. Such digital tokens are centered around popular internet memes and viral online trends, spotlighting risk-taking appetite among America's day-trading brigade. 

“What I see is just raw speculation and I don't think it's good for the long term,” Jim Bianco of Bianco Research said by phone. “If you're just going to trade it as a casino chip, you're not going to get into Bitcoin to become an alternative to the current financial system.”

For some, the retail craze can be sliced and diced as a bull-market warning that suggest buying power is getting exhausted. Last July, when similar risk-taking behavior emerged among day traders, the S&P 500 peaked later in the month before falling into a 10% correction.

The meme frenzy in early 2021 didn't lead to an immediate pullback in the broad market as money rotated to technology megacaps. Yet as concerns over Fed monetary tightening started to build coming into 2022, the S&P 500 eventually entered a bear market.

This time round, the stock faithful cite the benign outlook for the monetary and business cycle. Still as investors continue to chase the upward momentum of risky investing styles, it's starting to make some market participants a tad uncomfortable.

“It's a FOMO, YOLO and MOMO market,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “It's hard to tell where that next leg of liquidity would come from.”

--With assistance from Rita Nazareth, Edward Bolingbroke and Lu Wang.

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