A surge in new investors who share tips on social media and invest in meme stocks could be a risk to the financial system, the Fed said.
Michael Nagle/Bloomberg
The Federal Reserve said stock market volatility linked to a surge in new investors who share tips on social media and invest in meme stocks could be a risk to the financial system, according to the central bank’s latest twice-yearly financial stability report.
The Fed said new commission-free trading platforms that offer partial share ownership and flashy graphics have encouraged a generation of young traders to jump into the stock market, and the size of this new group makes it important for regulators to monitor.
Swings in the prices of popular meme stocks such as GameStop
(ticker: GME) and AMC Entertainment (AMC) so far have had a limited effect on financial stability, the report concluded, but new, younger investors tend to have higher debt and often use options, two factors that could exacerbate losses in a downturn.
The Fed said financial institutions should consider the potential for increased volatility that the meme stock phenomenon could endanger and that “more frequent episodes of higher volatility may require further steps to ensure the resilience of the system.”
Other vulnerabilities include valuations for stocks and real estate, which are elevated relative to corporate earnings and rents. The Fed noted there is little evidence of deteriorating credit standards or highly leveraged investment activity in the housing market.
U.S. public health and its potential to worsen because of Covid-19 remain the greatest near-term risks to the financial system, the Fed said. Deterioration could slow the recent economic recovery, especially if businesses close and supply chains are disrupted further.
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