With broader stock market indices slipping into a bit of a coma this week, the talk about the financial markets is still the awakening of private investors to the US stock market.
Global stocks saw the largest weekly inflow of money ever, at $ 5.8 billion, Bank of America said, citing EPFR Global data. Not all that money belongs to day traders, of course, but it’s a sign of the frenzy. Michael Every, global strategist at Rabobank, asks an interesting question. “You can only see how stable a system really is by logically pushing it to its limits, which we do on several fronts,” he says. “How will it work if 50% of people decide to day-trade central bank liquidity for a free ride to prosperity,” he asks. “Obviously someone has to cook and deliver pizzas to those day traders.”
That question remains unanswered for now (and at least it’s chicken tenders, not pizza, for the Reddit WallStreetBets crowd). But a new research paper quantifies the impact of the retail investment boom on the US stock market. Using data on account holders from Robinhood Markets and the 13-F filings from major portfolio managers, researchers were able to estimate demand from retail and institutional clients.
The impact was enormous. Robinhood traders accounted for more than 7% of the variation in stock returns during the second quarter, the researchers found. Without the Robinhood crowd, the total market capitalization of the smallest quintile of US stocks would have been over 30% lower.
A few well-known companies got hit by Robinhood long before GameStop mania started. Ford Motor Co.’s F,
returns would have been 7.5 percentage points lower in the first quarter of 2020 without Robinhood traders and General Electric GE,
would have dropped another 2.75 points. In the second quarter, Ford’s returns would have been more than 20 percentage points lower, and Delta Air Lines DAL,
and United Airlines UAL,
would have been more than 15 points worse each, the researchers said.
“The surprisingly high overall impact of the small retail sector is due to the fact that much of the stock market is managed by institutional investors with price-inelastic demand curves,” said the researchers, Philippe van der Beck of École Polytechnique Fédérale. de Lausanne and Swiss Finance Institute, and Coralie Jaunin from the University of Lausanne and Swiss Finance Institute.
Read that last sentence again and think about it. Much of the stock market does not matter what the price is. Why should they? Very popular index funds try to replicate indexes at all costs. Despite all the focus on short sellers, the Robinhood crowd can influence the price of large companies predominantly owned by passive institutional investors, the researchers said.
And while Van der Beck and Jaunin focused their analysis on 2020, they did look at current events. Yes, video game store GameStop GME,
and cinema chain AMC Entertainment AMC,
saw extraordinary gatherings, as retailers organizing on Reddit’s WallStreetBets forum crowded out hedge funds. But what about headphone maker Koss KOSS,
with a negligible short-term interest rate, which has increased from $ 4 to $ 110?
They specifically applied their methodology to GameStop. Buying 10% of GameStop’s outstanding shares could have caused a 57% rise in the stock price, based on institutional ownership as of July, the researchers said.
The buzz
Entertainment conglomerate Walt Disney Co. DIS,
Up 2% in premarket trading as it reported a surprising fourth quarter gain as the number of Disney + streaming service subscriptions grew to 94.9 million.
Cloud monitoring service Datadog DDOG,
5% as it offered a 2021 outlook below Wall Street estimates. Cybersecurity company Cloudflare NET,
fell 6% after its earnings forecast met Wall Street estimates.
Bausch Health BHC,
Up 5% in premarket trading as activist investor Carl Icahn took a nearly 8% stake in the generic drug manufacturer.
A group of seven finance ministers and central bankers will hold a virtual meeting, with a readout around 10 a.m. East.
The University of Michigan Consumer Sentiment Index highlights the economic calendar. The UK reported a 1% increase in gross domestic product in the fourth quarter, which nevertheless rounded off a 9.9% decline for 2020, the worst performance in more than 300 years. Read what happened 300 years ago.
The market
US Equity Futures ES00,
NQ00,
were lower on Friday morning, with most of Asia closed for New Year celebrations.
The gap between the revenues on the Italian TMBMKIT-10Y,
and German TMBMKDE-10Y,
Bonds with a maturity of 10 years fell to their lowest level in six years as the 5-star movement was overwhelmingly backing into a government led by Mario Draghi, the former president of the European Central Bank.
The tweet
“Pink elephants on the moon” is one way of describing the current market environment.
Random reads
It’s worth checking out this 2015 Vanity Fair profile of Whitney Wolfe Herd, now billionaire following online dating app Bumble’s BMBL,
trading debut on Thursday.
Red wine, champagne and baked Alaska – the 117-year-old nun who survived COVID-19 celebrated in style.
These pigs can play video games – and are pretty good, too.
Need to Know starts early and will update until the opening bell, but sign up here to get it in your email box once. The emailed version will ship at approximately 7:30 a.m. East.
Do you want more for the day ahead? Sign up for The Barron’s Daily, a morning investor briefing, including exclusive commentary from Barron’s and MarketWatch writers