As stocks rally in 2023, investors can’t stop thinking about 2021

The year is 2023. But hindsight is still 2021 on Wall Street.

For an industry known to be forward-looking, investors are still trying to make sense of the last two years.

In 2021, easy money policies and post-pandemic stimulus ushered in the “meme stock” era and investor enthusiasm for anything tech-related and growing fast. Bonus points were awarded if the company didn’t make any money as a bubble broke out that year.

Then in 2022, much of this mania came crashing down as the Federal Reserve raised interest rates aggressively in an effort to slow inflation.

“It’s not higher interest rates that are the problem — it’s the transition from stupid, free, incredibly ridiculous money at zero cost to something more normal,” Rich Handler, CEO of investment bank Jefferies, said during an interview at the iConnections Global Alts conference in Miami, Florida last week.

But in the new year has emerged a new market. And a new market that looks a bit like what we witnessed two years ago.

The Nasdaq has soared 15% to start 2023, spurred higher by rallies in some of the biggest losers of last year like Tesla (TSLA) and Coinbase (COIN). Even beleaguered, left-for-dead names like Carvana (CVNA) have been on a tear.

“Every time the so-called ‘meme stocks’ — the garbage — have taken off, that’s been the end of the rally, not the beginning of the rally,” short seller Jim Chanos said during a panel discussion.

Across dozens of panels and on-stage discussions at the event, the excesses of 2021 and the consequences investors continue to face as a result served as a dominant theme.

Social Capital founder Chamath Palihapitiya, known for sponsoring a wave of SPACs — or special purpose acquisition companies — that brought speculative tech companies to the public market, is now calling the era of low interest rates a mistake.

As the market waned last year, two of the six blank-check companies Palihapitiya launched were liquidated and the others that went public are trading well below their listing price.

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“In the industry we are in, there are a couple of dirty little secrets, or the dirty soft underbelly,” Palihapitiya said, referring to the technology sector, in an on-stage interview Wednesday at the Fontainbleau Hotel. “One of them is that only 10% of all firms in our asset class actually generate real returns, which means 90% are basically floundering around burning money.”

“There’s this dance that this industry has been able to play because interest rates have been at zero, so as investors, the asset class I think is very challenged in order to generate real returns now,” Palihapitiya added.

“The companies that we funded as a result of all this excess capital have been more poorly run than otherwise, and so we need to course correct. We need these rates to be sustained for five, six, seven years frankly, hopefully, in order to really flush it through the system.”

While many recollect the mistakes of the post-pandemic market, however, it’s unclear whether lessons have been learned just yet.

The Federal Reserve has now raised interest rates eight times since March 2022, bringing the federal funds rate to 4.50% from near-zero levels. Federal Reserve officials keep asserting rates will go higher, and likely above 5%.

But markets have seemed to ignore them — even pricing in cuts by the end of the year — and the start of 2023 continues to see many of 2021’s themes, even as some investors say they’re behind us.

“The market just does not want to believe that the Fed is going to continue to be hawkish and remain hawkish, and we have multiple price cuts baked into the cake here by the end of the year,” SEI chief investment officer Jim Smigiel said in a recent note. “We would probably call this a junk rally: there’s too much disconnect between what’s happening with monetary policy and what the market’s interpretation of that is right now.”

Morgan Stanley’s top stock strategist, Mike Wilson, said during a panel last week recent gains across the stock market are merely an outcome of the January Effect — a seasonal anomaly that sees stocks rise in the first month of the year following a year-end sell-off for tax purposes.

With expectations for corporate earnings growth to turn negative, Wilson sees the S&P 500 falling as low as 3,200 this year, even if a recession doesn’t play out. On Friday, the index closed at 4,136.

The way Jefferies chief market strategist David Zervos sees it, the Fed is giving investors “tough love,” he said during a panel discussion.

“For the long-term equity investor, this Fed is doing exactly what you want.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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