Look who’s back.
After a long absence, the active individual investors came back in full force. And while this may literally be true to some extent at GameStop Corp. GME,
Saga, the biggest questions for investors of all stripes are whether an apparent resurgence on the retail front is going to last and what it will mean for the stock market as U.S. benchmarks march to historic highs.
It’s been a long time.
The shares saw the strongest bull market in history after the 2008 financial crisis “with no prominent retail interest in it,” said Chris Konstantinos, chief investment strategist at RiverFront Investment Group, in an interview.
He noted that total flows of securities funds have exceeded equity flows by nearly $ 3 trillion since 2007. In fact, individual investors seemed interested in almost everything, from real estate to cryptocurrencies, said Konstantinos.
A change began last year, with the onset of the coronavirus pandemic. Sequential growth in broker accounts like Charles Schwab Corp. SCHW,
that cater to individual investors “were notable” at the end of the second quarter of 2020 and were followed by a huge spike in growth in the following quarter, said Lori Calvasina, head of US equity strategy at RBC Capital Markets, on February 2 notes.
At the same time, Google’s searches for “day trading” have also increased, she noted (see charts below).
RBC Capital Markets
Calvasina and others acknowledged that a combination of blockade-related boredom and US government stimulus checks likely played a role in increasing individual investment interest.
The jury is deciding whether the increase in interest in retail trade will last, said Ed Clissold, chief strategist for the United States at Ned Davis Research Group, in an interview. It is not clear how much of the acceleration in retail trade merely reflects individuals throwing extra money through stimulus checks in the market, he said.
This type of trading looks more like a game than an investment, he said, noting that the “foamy” stock market tends to disappear quickly.
But others argued that individual investors are likely to remain.
‘Structural change’
Calvasina said the RBC suspects that “a structural change may be taking place and that retail investors are likely to continue to be larger participants in the US stock market.”
In that case, this will require an attitude adjustment on the part of Wall Street professionals, who have become accustomed to paying little attention to individual investors.
After all, powerful waves of passive and systematic investment have made individual investors largely irrelevant to market forecasting analysts, Société Générale strategists wrote in a note on Thursday.
But the market volatility created by GameStop’s situation served as a wake-up call, analysts said.
While GameStop and other heavily sold names skyrocketed, hedge funds and other investors were seen liquidating long positions elsewhere to make profits and cover losses, putting pressure on the stock markets. The main benchmarks ended January on a bitter note, with the Dow Jones Industrial Average DJIA,
S&P 500 SPX,
and Nasdaq Composite COMP,
registering its biggest weekly drops since October.
Watch: ‘My family won’t let me go hungry’: two young traders reveal the dangers of trying to surf the GameStop epic wave
US stocks soared last week, however, with benchmarks setting historical records, with GameStop dropping more than 80%.
Need to know: GameStop’s meteoric gains disappeared almost entirely – here’s some advice for those who didn’t make it in time
SocGen analysts described the phenomenon as part of a broader trend that has seen individual investors driving demand for investments that take into account environmental, social and corporate governance standards, or ESG.
“Rather than criticizing retail investors and their patterns of behavior, it is better to insert them into the money equation,” they wrote. “After all, it’s not just office workers who are stuck at home on snowy days, but also very active day traders with access to cheap platforms.”
Booth fever is not the only factor driving renewed interest in the market by individual investors, whose ranks are not just made up of fast day traders.
Leveling the field
Some individual investors who previously avoided stocks may finally succumb to the notion that ultra-low yields on bonds and elsewhere leave few alternatives for the stock market. The shares still look attractive when it comes to dividends or earnings from profits, Konstantinos said.
In addition, there has been 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 increase in low-rate trading platforms, have placed individual investors “in a position closer to institutional investors than at any other time in history”, he said.
In fact, some market watchers have argued that the conventional brand of individual investors like “dumb money” seems increasingly misguided, especially after the GameStop episode showed investors supposedly “smart money” shorting more than 100% of the shares company, leaving them fully open to a short, painful squeeze.
The retail trade frenzy that surrounded the little pressure on GameStop and a handful of other heavily sold small caps raised a red flag for investors looking for the kind of foam that signals a bullish is entering the kind of euphoric phase normally followed by a setback.
Next leg?
While this may be the case in the short term, some investors say that a sustained acceleration in the interest of individual active investment could help fuel the next stage of a bull market.
Individual investors can continue to fuel interest in more value-oriented names, lower capitalization and greater volatility, said Konstantinos.
And sustained interest in individual securities may mean more “dispersion” or variation in returns between individual stocks and sectors, said Clissold – an element that has been lacking in the past decade for the pain of active fund managers.
Calvasina argued that retail interest in specific stocks should decline and decline, as it did last year, but it probably will not go away.
“Unless the door closes (that is, through a major regulatory change), we fail to see why the retail investor’s interest in trading specific names will completely disappear, given how high the money is on the margins of consumers, ”she wrote.