(Fortune) - Retail investors flooded into so-called meme stocks like AMC and GameStop during the pandemic hoping to net quick profits in a market that just seemed to keep on soaring.
In 2022, with interest rates climbing and the stock market struggling, it’s a different story.
Goldman Sachs analysts, led by David J. Kostin, revealed in a Tuesday research note that retail investors have sold most of their U.S. stock purchases from the last two years. And over the last seven weeks alone, $26 billion has flowed out of U.S. equity ETFs and mutual funds, which are often traded by retail investors.
How it started
Rising stock prices, stimulus checks, and near-zero interest rates led investors to rush into the stock market like never before during the pandemic.
In fact, U.S. investors sank more than $1 trillion into stocks in 2021 alone, the Financial Times reported in December. That’s more than the prior 20 years combined, and three times more than the previous annual record.
On top of that, the “democratization” of investing due to the expansion of low-cost trading applications like Robinhood, and the birth of large online communities of traders on forums like Reddit’s r/wallstreetbets, spawned a meme stock revolution in 2021.
Meme stocks are equities that gain a cult-like following on social media platforms. Typically, these stocks are targeted by retail traders due to their high short interest, which means that a large number of short-sellers—traders who bet a stock’s price will fall by borrowing shares and then selling them at market price hoping to buy the shares back at a later date for less—have shorted the stock, making it susceptible to something called a short-squeeze.
A short-squeeze happens when short-sellers are forced to buy shares (i.e., cover their shorts) in order to exit their positions as a stock rises, pushing the stock even higher.
The meme stock era propelled the share prices of formerly unloved, and mostly unprofitable, names like GameStop to new heights in the first few months of 2021. The video game retailer eventually saw its shares jump over 2000% to a short-lived record high of $483 by Jan. 28.
By Will Daniel
