Look who’s back.
After a long absence, the active individual investors returned with revenge. And while this may be literally true to some extent in GameStop Corp. GME,
saga, the bigger questions for investors in all categories are whether it will withstand an apparent resurgence in the retail market and what it will mean for the stock market, as US benchmarks move toward historical highs.
It’s been a long time.
Stock markets saw the strongest bullfighting market in history following the 2008 financial crisis “with no retail interest,” Chris Konstantinos, chief investment strategist at RiverFront Investment Group, said in an interview.
He noted that total bond fund flows have exceeded stock flows by nearly $ 3 trillion since 2007. In fact, individual investors seemed interested in almost everything from real estate to cryptocurrencies, Konstantinos said.
A change began last year with the emergence of the coronavirus pandemic. Sequential account growth for brokers such as Charles Schwab Corp. SCHW,
addressing individual investors “was remarkable” at the end of the second quarter of 2020 and was followed by a major increase in growth in the next quarter, said Lori Calvasina, head of US equity strategy at RBC Capital Markets , in a February. 2 note.
At the same time, Google searches for “daily trading” have also increased, she said (see charts below).
RBC capital markets
Calvasina and others acknowledged that a combination of boredom related to blocking and stimulus checks by the US government probably played a role in increasing individual investment interest.
The jury found out if the increase in interest rates in retail will increase, said Ed Clissold, US chief strategist at Ned Davis Research Group, in an interview. It is unclear how much of the rise in retail reflects only those who throw extra money through market stimulus controls, he said.
This type of trading feels more like gambling than investing, he said, noting that “foamy” market share tends to disappear quickly.
But others have argued that individual investors are likely to stay around.
“Structural change”
Calvasina said RBC suspects that “structural change may be underway and that retail investors are likely to remain larger players in the US capital market in the future.”
If so, this will require an adjustment in the attitude of Wall Street professionals, who have become accustomed to paying little attention to individual investors.
After all, strong waves of passive and systematic investment have made individual investors largely irrelevant to analysts preparing market forecasts, strategists from Société Générale wrote in a note on Thursday.
But the market volatility created by the GameStop situation served as a wake-up call, analysts said.
While GameStop and other highly abbreviated names have risen, hedge funds and other investors have been seen liquidating long positions elsewhere to take profits and cover losses, putting pressure on stock markets. The major benchmarks ended in January with a sharp note, with DJIA Dow Jones Industrial Average,
S&P 500 SPX,
and Nasdaq Composite COMP,
recording the largest weekly declines in October.
See: “My family won’t let me go hungry”: two young traders reveal the dangers of trying to navigate the epic wave of GameStop
US stocks screamed back in the past week, however, benchmarks hitting all-time highs as GameStop fell more than 80%.
I need to know: GameStop’s earnings have almost completely disappeared – here are tips for those who didn’t make it in time
SocGen analysts have presented the phenomenon as part of a broader trend, which has seen individual investors driving investment demand that take into account environmental, social and corporate governance or ESG standards.
“Rather than criticizing retail investors and their behavioral patterns, it’s better to fit them into the money equation,” they wrote. “After all, not only office workers are locked up at home on snowy days, but also very active day traders with access to cheap platforms.”
Cabin fever is hardly the only factor seen that determines the renewed interest in the market by individual investors, whose ranks do not consist only of day traders with rapid fire.
Leveling the field
Some individual investors who have previously avoided stocks may eventually succumb to the notion that ultra-low bond yields elsewhere leave little alternative to the stock market. The shares remain attractive when it comes to dividend or profit returns, Konstantinos said.
Moreover, there are a level playing field between institutional and individual investors in recent decades. The FD Regulation (for “full disclosure”) and other regulatory changes, as well as the growth of low-fee trading platforms, have placed individual investors “on a closer basis to institutional investors than at any other time in history,” he said. he.
Indeed, some market observers have argued that the conventional marking of individual investors as “dumb money” seems increasingly wrong, especially after the GameStop episode, pointed to alleged “smart money” investors who shortened more than 100%. the company’s actions, leaving them wide open at a brief squeezing pain.
The retail frenzy surrounding the shortfall on the GameStop and a handful of other low-capacity, short-circuited stocks have raised a red flag for investors looking for the kind of foam that signals a rally is entering the usual euphoric phase. by a withdrawal.
The next step?
While this may prove to be the case in the short term, some investors argue that a sustained increase in individual interest rates could help fuel the next stage of a bull market.
Individual investors could continue to fuel interest in more value-oriented, smaller and more volatile names, Konstantinos said.
And sustained interest in individual securities could mean more “dispersion” or variation in returns between stocks and individual sectors, Clissold said – an element that has been lacking in the last decade due to the pain of active fund managers.
Calvasina argued that retail interest in certain stocks is likely to decline and flow, as it has in the past year, but is unlikely to go away.
“Unless the door closes (ie through a major regulatory change), we fail to see why retail investor interest in trading specific names will go completely, given how much cash is on the margins of consumers. She wrote.