Market Animal Spirits Revived, Resurrecting Speculative Activity Resembling 2021 Trends

Bitcoin soaring, SPACs surging, and chatroom trading gaining momentum — it’s like a déjà vu of 2021.

In December, the Federal Reserve’s indication of rate cuts sparked a frenzied surge to all-time highs, igniting the animal spirits that are propelling speculative fervor reminiscent of the pandemic era.

“The animal spirits are making a comeback,” remarked Michael Hartnett, chief investment strategist at BofA Global Research, during a phone interview. He pointed to the remarkable rally in emerging market distressed debt, which has surged approximately 25% from its October lows.

“When investors seek safety, they typically don’t turn to emerging market distressed debt. But now, countries like Nigeria and Argentina are in the spotlight,” Hartnett observed. “The catalyst behind all of this is the Fed’s change in direction.”

Bitcoin hits $64,000, soaring 45% in February, marking the sixth consecutive month of gains. (Credits: Unsplash)

The prevailing sentiment driving investors towards some of the riskiest corners of the market hinges on a particular belief: that inflation will ease back to the central bank’s 2% target, the economy will sidestep a recession, and a series of rate cuts will follow. These collective expectations have propelled the S&P 500 upward for four consecutive months, achieving consecutive milestones above the 5,000 mark. Meanwhile, the Nasdaq Composite recently surpassed its 2021 record close on Thursday.

Cryptocurrency has also joined the fray, with Bitcoin reaching $64,000 this week, marking its first ascent to such heights since November 2021. It surged by nearly 45% in February alone, extending its winning streak to six consecutive months.

Simultaneously, the “WallStreetBets” forum on Reddit is ablaze once more, with individual traders endorsing familiar favorites like GameStop and embracing new darlings such as Palo Alto Networks and Snowflake.

For an investor, it might seem as though the downturn of 2022 never occurred. An index gauging the sentiment of discussions on the Reddit forum recently hit its most bullish level since June 2021, as reported by alternative data provider Quiver Quantitative.

Wall Street
The WallStreet Bets forum is ablaze with GameStop hype, Reddit sentiment index bullish since June 2021.

” ‘The Return of the YOLO’ was not on my February bingo card,” remarked Scott Rubner of the Goldman Sachs trading desk in a note, alluding to the enthusiasm behind the “You Only Live Once” sentiment. “Activity on the message boards is at the highest level since March 2020. I need to wake up every morning to see ‘what stock can rally 50% by Friday.’… U.S. Equities have entered a period of euphoria,” he elaborated.

Even SPACs, the pandemic phenomenon, are exhibiting signs of resurgence after experiencing a drought over the past couple of years. In just two months of 2024, there have been 33 pending SPAC IPOs, surpassing the total for all of 2023, according to SPAC Research. Notably, the digital investing platform Webull is set to go public through a SPAC deal valued at a staggering $7.3 billion.

“Animal spirits, they don’t necessarily start with the biggest animals in the jungle,” noted Quincy Krosby, chief global strategist at LPL Financial, during a phone conversation. She highlighted a flurry of mergers and acquisitions among biotechs and pharmaceuticals as additional evidence.

However, some argue that the market rally is justified by the enthusiasm for artificial intelligence and its potential contribution to future corporate profits. Billionaire investor Ray Dalio opined that the U.S. stock market is not in a speculative bubble based on his criteria. “Until [the Fed pivot] is proved to be a mistake, risk-taking is what we live in,” concluded Hartnett.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
Notify of
Inline Feedbacks
View all comments
Would love your thoughts, please comment.x