Animal spirits are back in the market, fueling 2021-like speculative activity

Published Fri, Mar 1 20247:01 AM EST

Bitcoin to the moon, SPACs on the rise, chatroom trading all the rage — it can feel like 2021 all over again. The Federal Reserve's rate-cut signal in December triggered a furious rally to record highs, unleashing animal spirits that are fueling similar speculative activities from the depths of the pandemic. "The animal spirits are reviving," Michael Hartnett, chief investment strategist at BofA Global Research, said in a phone interview. The most obvious example is the rally in emerging market distressed debt, which has climbed about 25% from the lows in October, he said. "When people want to play safe, they don't buy emerging market distressed debt. Nigeria and Argentina aren't the places to be, but they are now," Hartnett said. "The catalyst for all of this is the Fed pivot." The conventional wisdom today that's driving investors to some of the riskiest parts of the market goes like this: inflation will fall to the central bank's 2% target while the economy will avoid a recession before a series of rate cuts arrive. Those combined hopes have pushed S & P 500 up for four months straight, hitting consecutive records above the 5,000 milestone. The Nasdaq Composite just topped its 2021 record close on Thursday. BTC.CM= YTD mountain bitcoin Cryptocurrency has joined the party, too. Bitcoin touched $64,000 this week for the first time since November 2021. It jumped nearly 45% in February alone, its sixth straight month of gains. Meanwhile, the "WallStreetBets" forum on Reddit is red hot again, with retail traders touting old favorite GameStop and new loves ranging from Palo Alto Networks to Snowflake . An investor might be forgiven for thinking the slump of 2022 never happened. An index that measures the sentiment of discussion on the Reddit forum recently hit the most bullish level since June 2021, according to alternative data provider Quiver Quantitative. "'The Return of the YOLO' was not on my February bingo card," Scott Rubner of the Goldman Sachs trading desk said in a note, referring to "You Only Live Once" enthusiasm. "Activity on the message boards is at the highest level since March 2020. I need to wake up every morning to see 'what stock can rally 50% by Friday.'.. U.S. Equities have entered a period of euphoria," he wrote. Even that pandemic wonder known as SPACs, or special purpose acquisition companies, is showing signs of a revival after suffering a drought over the past two years. There have been 33 pending SPAC IPOs in just two months of 2024, surpassing the number in all of 2023, according to SPAC Research. Notably, digital investing platform Webull is planning to go public through a SPAC deal that values the firm at a whopping $7.3 billion. "Animal spirits, they don't necessarily start with the biggest animals in the jungle," Quincy Krosby, chief global strategist at LPL Financial, said by phone. She pointed to a flurry of mergers and acquisitions among biotechs and pharmaceuticals as further evidence. To be sure, others believe the market rally has been justified by the enthusiasm for artificial intelligence, and the contribution it's likely to make to future corporate profits. Billionaire investor Ray Dalio said the U.S. stock market is not in a speculative bubble based on his criteria. "Until [the Fed pivot] is proved to be a mistake, risk taking is what we live in," Hartnett said.