Look who’s back.
After a long absence, active individual investors have returned with vengeance. And while that may be literally true to some extent in the GameStop Corp. GME,
saga, the bigger questions for investors of all levels are whether an apparent resurgence on the retail trading front will last and what it will mean for the stock market as US benchmark indices march to record highs.
It’s been a while.
Stocks saw the strongest bull market in history after the 2008 financial crisis “without any prominent retail interest,” Chris Konstantinos, chief investment strategist at RiverFront Investment Group, said in an interview.
He noted that total bond fund flows have been nearly $ 3 trillion higher than equity flows since 2007. In fact, individual investors seemed interested in almost everything from real estate to cryptocurrencies, Konstantinos said.
A shift began last year when the coronavirus pandemic began. Successive growth of accounts with brokers such as Charles Schwab Corp. SCHW,
targeting individual investors “was remarkable” at the end of the second quarter of 2020 and was followed by strong growth in the following quarter, said Lori Calvasina, head of US equity strategy at RBC Capital Markets. 2 note.
At the same time, Google searches for ‘day trading’ also increased, she noted (see charts below).
RBC Capital Markets
Calvasina and others acknowledged that a combination of lockdown-related boredom and US government stimulus checks likely played a role in the rise in individual investment interests.
The jury is out on whether the resurgence of retail trade interests will continue, Ed Clissold, chief US strategist at Ned Davis Research Group, said in an interview. It’s unclear how much of the retail boom just reflects individuals throwing extra money through stimulus controls in the marketplace, he said.
That kind of trading feels more like gambling than investing, he said, noting that “frothy” market action tends to disappear quickly.
But others argued that individual investors are likely to stick around.
‘Structural change’
Calvasina said RBC suspects that “structural change is underway and that private investors are likely to remain bigger players in the US stock market in the future.”
If so, it will require a change in the attitude of Wall Street professionals, who were used to paying little attention to individual investors.
After all, powerful waves of passive and systematic investment had made individual investors largely irrelevant to analysts coming up with market forecasts, Société Générale strategists wrote in a note on Thursday.
But the market volatility created by the GameStop situation served as a wake-up call, the analysts said.
While GameStop and other high-short names boomed, hedge funds and other investors elsewhere saw long positions liquidated to take profits and cover losses, putting stock markets under pressure. Major benchmarks ended on a sour note in January, with the Dow Jones Industrial Average DJIA,
S&P 500 SPX,
and Nasdaq Composite COMP,
log their biggest weekly declines since October.
See: ‘My Family Won’t Make Me Go Hungry’: Two Young Traders Reveal the Dangers of Surfing GameStop’s Epic Wave
However, US stocks bounced back over the past week and the benchmarks hit all-time highs as GameStop plunged more than 80%.
Must know: GameStop’s massive winnings have almost completely disappeared – here’s advice for those who didn’t get out on time
The SocGen analysts viewed the phenomenon as part of a broader trend where individual investors have stimulated demand for investments that take into account environmental, social and corporate governance, or ESG standards.
“Rather than criticizing retail investors and their behavioral patterns, it is better to let them fit the money equation,” they wrote. “After all, it’s not just office workers who are locked up at home on snow days, but also very active day traders with access to low-cost platforms.”
Cabin fever is not the only factor driving renewed interest in the market by individual investors whose ranks are not all fast day traders.
Leveling the field
Some individual investors who previously shunned stocks may finally succumb to the notion that ultra-low yields on bonds and elsewhere leave little alternative to the stock market. Stocks still look attractive when it comes to dividend or earnings yields, Konstantinos said.
In addition, the playing field between institutional and individual investors has flattened in recent decades. FD regulations (for “full disclosure”) and other regulatory changes, as well as the emergence of low-cost trading platforms, have placed individual investors “closer to institutional investors than ever before,” he said.
Indeed, some market viewers have argued that the conventional branding of individual investors as the ‘stupid money’ is looking increasingly misleading, especially after the GameStop episode showed investors with ‘smart money’ short more than 100% of the company’s stock. went wide, leaving them wide open. to a painful short squeeze.
The retail frenzy that surrounded the brief press on GameStop and a handful of other heavily shorted small-cap stocks set a red flag for investors on the lookout for the kind of foam that signals a rally is entering the kind of euphoric phase typically followed. by withdrawal.
Next leg?
While that could prove to be the case in the short term, some investors believe that a sustained increase in active individual investment holdings could contribute to the next leg of a bull market.
Individual investors could continue to pique interest in more value-oriented names with smaller capitalization and higher volatility, Konstantinos said.
And continued interest in individual securities could lead to more “diversification,” or variation in returns between individual stocks and sectors, Clissold said – an element that has been missing for the past decade, much to the pain of active fund managers.
Calvasina argued that retail interest in specific stocks is likely to ebb and flow, as has done for the past year, but is unlikely to fade.
“Unless the door closes (ie due to a major regulatory change), we do not understand why retail investors’ interest in trading specific names will completely disappear, given that there is a lot of cash on the sidelines among consumers”, she wrote.