The 2021-2022 Fads Are Crumbling

This should be a calm, quiet year-end week in the stock market. Instead, it has started with the 2021-2022 fads noisily falling apart. This looks like the final stage of fads going bad, and it’s everywhere: SPACs, biotechs, IPOs, cryptos, dazzling story stocks, ETFs, meme stocks, no- or low-earning growth stocks and leveraged stock funds.

While fewer investors remain in the fad games, such widespread blowups have a way of spewing shrapnel far afield. Therefore, observe the action, but be careful about stepping into other, seemingly safer areas of the stock market. Remember that there are still many, serious concerns that have been ebbing and flowing (like inflation and recession). They can quickly catch fire and take on an outsized focus in investors’ worried minds.

Recent Wall Street Journal articles highlighted three fad developments:

“Deflated IPO Stocks Under Threat of Delisting” (Dec. 20)

“SPAC Boom Ends in Frenzy of Liquidation” (Dec. 27)

“Small Investors Stay Bullish, Even as Pros Unload Stocks” (Dec. 19)

More of such articles will follow in the WSJ and elsewhere. As an example, I recently wrote, “Many ETFs (Exchange Traded Funds) Now At Risk – Don’t Get Caught” (Dec. 20)

So, is this a final selloff week?

No. In two articles I discussed the likelihood of the stock market entering a period of dual actions: shakeout and washout.

Importantly, such major stock market shifts are not quick affairs. They take time. Moreover, they build a negative environment that can end with a final selloff.

How long before that happens? It’s hard to foretell timing because there are so many fads to unwind and there are so many uncertainties facing the U.S. economy and financial system. Based on previous selloffs with complexity, it could take a quarter or more to work through them.

Therefore, as I explained in “2023 Stock Market Outlook – OK To Hope For Best, But Prepare For Worst,” the best investing strategy looks to be a healthy portion of cash reserves – to preserve assets, protect against emotional selling at the wrong time, and to provide the means for taking advantage of future buying opportunities.

The bottom line: Don’t shop for reasons to be an optimistic investor

The best mental strategy for investors now is to accept the messy complexity and the realistic uncertainties in the U.S. economy, financial system and capital markets. Certainly, have faith that things will work out in the end. However, don’t try to put a happy face on current events, seeking to build false investment optimism.