With the broadest stock market indices in a coma this week, the talk of the financial markets is still the wake-up call by retail investors to the US stock market.
Global equities had the largest weekly cash inflow of all time, at $ 5.8 billion, said Bank of America, citing data from EPFR Global. Not all that money comes from day traders, of course, but it is a sign of frenzy. Michael Every, global strategist at Dutch bank Rabobank, poses an interesting question. “You only see how stable a system really is by logically pushing it to its limits, which we are doing on several fronts,” he says. “How will it work if 50% of people decide to trade with the central bank’s liquidity in exchange for a ride to prosperity? “Obviously, someone needs to cook and deliver pizza to these day traders.”
That question, for now, will remain unanswered (and, in any case, are chicken, not pizza, proposals for Reddit WallStreetBets folks). But new research work quantifies how big the impact of the retail investment boom was on the United States stock market. Using data from Robinhood Markets account holdings and the 13-F files of major portfolio managers, the researchers were able to estimate retail and institutional demand.
The impact was enormous. Robinhood traders accounted for more than 7% of the change in stock returns during the second quarter, the researchers found. Without Robinhood’s crowd, the aggregate market capitalization of the smallest quintile of US stocks would have been 30% less.
Some well-known companies were moved by Robinhood, well before GameStop mania was established. Ford Motor Co. F,
the return would have been 7.5 percentage points lower in the first quarter of 2020 without traders Robinhood and General Electric GE,
another 2.75 points would have fallen. In the second quarter, Ford’s return would have been 20 percentage points lower, and Delta Air Lines DAL,
and United Airlines UAL,
it would have been 15 points worse each, the researchers said.
“The surprisingly large aggregate impact of the small retail sector is due to the fact that a large fraction of the stock market is managed by institutional investors with inelastic price demand curves,” said researcher Philippe van der Beck, from École Polytechnique Fédérale from Lausanne and Swiss Finance Institute, and Coralie Jaunin from the University of Lausanne and Swiss Finance Institute.
Read the last sentence again and think about it. A large part of the stock market does not care about the price. Why should they? The highly popular index funds seek to replicate indexes at any cost. Despite all the attention given to short sellers, Robinhood’s gang is able to affect the price of large companies that are held mainly by passive institutional investors, the researchers said.
And while van der Beck and Jaunin focused on their analysis in 2020, they looked at current events. Yes, GameStop GME video game retailer,
and the AMC Entertainment AMC movie network,
saw extraordinary increases as retailers organizing themselves on Reddit’s WallStreetBets forum squeezed hedge funds. But what about headphone maker Koss KOSS,
with insignificant short interest, which jumped from $ 4 to $ 110?
They applied their methodology specifically to GameStop. The purchase of 10% of GameStop’s outstanding shares could have caused a 57% jump in share prices, based on the institutional ownership of July, the researchers said.
The buzz
Walt Disney Co. DIS entertainment conglomerate,
increased 2% in the pre-market as it reported a surprising profit in the fourth quarter, with subscriptions to the Disney + streaming service growing to 94.9 million.
Datadog DDOG cloud monitoring service,
fell 5% as it offered a 2021 outlook below Wall Street estimates. Cyber security company Cloudflare NET,
it fell 6% after its profit forecast hit Wall Street estimates.
Bausch Health BHC,
rose 5% in the pre-market, with activist investor Carl Icahn acquiring nearly 8% of the shares of the generic drug maker.
The Group of Seven finance ministers and central bankers will hold a virtual meeting, with a reading around 10 am.
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, however, fell by 9.9% in 2020, the worst performance in more than 300 years. Read what happened 300 years ago.
The market
US stock futures ES00,
NQ00,
were smaller on Friday morning, with most of Asia closed for New Year’s celebrations.
The difference between the yields of the Italian TMBMKIT-10Y,
and German TMBMKDE-10Y,
The 10-year bonds fell to the lowest level in six years, with overwhelming support from the 5 Star Movement joining a government led by Mario Draghi, the former president of the European Central Bank.
The tweet
“Pink elephants on the moon” is a way of describing the current market environment.
Random readings
It’s worth checking out this 2015 Vanity Fair profile from Whitney Wolfe Herd, now a billionaire after the online dating app Bumble’s BMBL,
commercial debut on Thursday.
Red wine, champagne and roasted Alaska – the 117-year-old nun who survived COVID-19 celebrated in style.
These pigs can play video games – and they’re pretty good, too.
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