Fed warns Meme stocks could pose risk

Stocks that experience significant volatility due to social media attention – often referred to as memes stocks – have so far not threat...


Stocks that experience significant volatility due to social media attention – often referred to as memes stocks – have so far not threatened broader financial stability, but could open the door to vulnerabilities, the company said on Monday. Federal Reserve in a report.

The Fed’s biannual update on the U.S. financial system included a special section on the phenomenon of memes stocks. He attributed the trend, in which attention on Twitter, Reddit and other platforms encourages rapid entry or exit from hot stocks, to new trading technologies, including mobile apps, and changing demographics as young people enter the retail market.

“Along with the increase in risk appetite and the growing share of young retail investors, access to retail equity trading opportunities has widened over the past decade,” the report.

Social media can stimulate interest in stocks, and it can also create an echo chamber, in which “investors find themselves communicating more often with others with similar interests and views, reinforcing thus their views, even if those views are speculative or biased. “

Yet the internet-inspired stacks don’t necessarily create the conditions that will cause a massive stock market crash, the Fed report suggested.

“To date, the general implications for financial stability of changes in the characteristics and behaviors of retail equity investors have been limited,” the Fed said. The central bank specifically assessed what happened to AMC Entertainment and GameStop shares in January, noting that the activity and volatility of these stocks was accompanied by high activity on Twitter.

While the report concluded that “recent episodes of memes stock volatility have not left a lasting imprint on broader markets,” the Fed said a few trends “should be watched.”

The report points out that young indebted investors may be more vulnerable to fluctuations in stock prices, especially since they now use “options”, which allow traders to bet on rising or falling prices and who can amplify leverage and potential. losses.

The Fed also warned that “episodes of heightened risk appetite could continue to evolve with the interaction between social media and retail investors and could be difficult to predict,” and that financial firms may not -be not calibrated their risk management systems to reflect the volatility and losses that even stock market episodes could trigger.

“More frequent episodes of higher volatility may require additional measures to ensure the resilience of the financial system,” he said.

Looking at a wider range of asset classes and recent business activity, the Fed’s financial stability analysis has generally suggested that vulnerabilities have moderated compared to the start of the pandemic – but it did report high asset prices and a number of persistent risks.

Stock prices have risen “markedly”, according to the report, and prices relative to expected earnings remain near all-time highs. Home prices have climbed, he noted, although mortgage lending standards have not deteriorated too much. When lenders start lowering their standards, it can make the market more vulnerable.

The Fed noted that “corporate bond issuance has remained robust, supported by low interest rates”, also noting that “across the spectrum of ratings, the composition of newly issued corporate bonds is become more risky “.

And while many markets are showing signs of investor optimism, some financial strains from the pandemic shock persist.

Some sectors of commercial real estate continue to face challenges as “vacant offices are high and hotel occupancy rates remain depressed,” the report notes. In addition, “structural vulnerabilities persist in certain types of money market funds”, which could amplify a future shock to the system.

Money Market mutual funds melted during the pandemic and required a Fed bailout for the second time in a dozen years, and regulators are now looking at how to make them more resilient.

The report also warned that life insurers could struggle to raise funds in a pinch.

And he looked at climate risks. The central bank is among regulators now trying to understand the risks climate change could pose to banks, insurers and the financial system as a whole.

“The Federal Reserve is in the process of developing a climate scenario analysis program,” the report notes. “The Federal Reserve considers that an effective scenario analysis program, designed to be forward looking over a period of several years or decades, is distinct from its existing regulatory stress testing regime.”

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Newsrust - US Top News: Fed warns Meme stocks could pose risk
Fed warns Meme stocks could pose risk
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