Back to posts

Animal Spirits – Are They Back?

May 14, 2024 | Posted in: Wealth Strategies

You may recall the “Meme” stock mania in January of 2021 when shares of GameStop increased from $4.31 on January 4th to a closing high of $86.88 on January 27th. GameStop is a retailer of computer games, consoles, and accessories that has delivered minimal or negative earnings since 2019. Following its surge in 2021, the stock had fallen 87% to $11.09 by April 30th of this year. For no apparent fundamental reason, the stock appreciated 57% in the first ten days of May, surged 74% on May the 13th, and followed that with another 60% on May the 14th closing at a price of $49.25. Trading volume on 5/14 was 196.7 million shares which compares with average volume of 10 million shares and represents 64% of the outstanding shares. Based on its current market capitalization of $15.1 billion, the stock is selling at more than 2,200 times earnings!

GameStop stock is of no particular consequence in and of itself, but it raises an interesting question-are we in a stock market driven by speculation? Of course, we do not know the answer and our investment strategy is guided by longer term fundamentals. However, John Maynard Keynes argued that “when conditions for rational action are not present, people are driven by animal spirits.” So, we should be on the lookout for additional evidence of speculative fever and ensure that we do not abandon a well-constructed investment plan.