Individual Investors Are Back – Here’s What It Means For The Stock Market

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Look who’s back. After a long absence, active individual investors have returned wanting revenge. And while that may be literally true to some degree in the GameStop Corp. GME saga, + 19.20%, the biggest questions for investors of all stripes are whether an apparent resurgence on the retail front will last and what it will mean for companies. Actions. market as US benchmarks move to record highs. It has been a long time coming.

Stocks 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 bond fund flows have exceeded equity flows by nearly $ 3 trillion since 2007. In fact, individual investors seemed interested in just about anything else, from real estate to cryptocurrencies, Konstantinos said. A change came last year when the coronavirus pandemic took hold. Sequential growth in the accounts of brokers such as Charles Schwab Corp. SCHW, + 0.98% serving individual investors “was remarkable” at the end of the second quarter of 2020 and was followed by a large increase in growth in the following quarter. said Lori Calvasina, head of US equity strategy at RBC Capital Markets, in a Feb. 2 note. At the same time, Google searches for “daily transactions” were also on the rise, he noted (see charts below).

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RBC Capital Markets

Calvasina and others acknowledged that a combination of boredom related to the lockdown and stimulus controls by the US government likely played a role in the rally in individual investment interest. The jury is out on whether the spike in retail business interest will endure, Ed Clissold, chief US strategist at Ned Davis Research Group, said in an interview. It’s unclear how much of the rally in retail simply reflects people dumping extra money through market stimulus checks, he said. That kind of trading is more like a game than an investment, he said, noting that “frothy” market action tends to fade quickly. But others argued that individual investors are likely to stick around. “Structural change” Calvasina said that RBC suspects that “a structural change may be underway and that retail investors are likely to remain more important players in the US equity market. If so, that will require an attitude adjustment for Some of the Wall Street pros, who got used to paying little attention to individual investors. After all, powerful waves of passive and systematic investing had rendered individual investors largely irrelevant to the analysts preparing the forecasts. strategists at Société Générale wrote in a note Thursday. But the market volatility created by the GameStop situation served as a wake-up call, analysts said. As GameStop and other very short names skyrocketed, it was seen to hedge funds and other investors liquidating long positions elsewhere, to make a profit and cover loss s, putting pressure on equity markets. The major benchmarks ended January on a sour note, with the Dow Jones Industrial Average DJIA, + 0.30%, S&P 500 SPX, + 0.39% and Nasdaq Composite COMP, + 0.57% recording their biggest weekly declines since October. See: ‘My Family Won’t Let Me Go Hungry’ – Two Young Traders Reveal The Dangers Of Trying To Ride The Epic Wave Of GameStop. However, US stocks soared again last week, with the S&P 500 and Nasdaq hitting all-time highs as GameStop fell more than 80%. Need to know: GameStop’s meteoric gains have almost completely disappeared – here’s a tip for those who didn’t get out on time. SocGen analysts expressed the phenomenon as part of a broader trend that has seen individual investors driving the demand for investments that take environmental and social measures. and corporate governance standards, or ESG, into account. “Instead of criticizing retail investors and their behavior patterns, it is better to include them in the money equation,” they wrote. “After all, not only office workers are locked at home on snowy days, but also very active day traders with access to economic platforms.” Cabin fever is not the only factor driving renewed interest in the market by individual investors, whose ranks are not made up solely of fast intraday traders Leveling the field Some individual investors who previously shunned stocks might eventually succumbing 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 dividends or earnings performance, Konstantinos said. In addition, there is the leveling of the playing field between institutional and individual investors over the past decades. The FD regulation (for “full disclosure”) and other regulatory changes, as well as the rise of low-fee trading platforms, have put individual investors “in a closer position to institutional investors than at any other time in the world. the story, “he said. In fact, some market watchers have argued that the conventional branding of individual investors as “dumb money” seems increasingly misguided, particularly after the GameStop episode showed that supposedly “smart money” investors shorted more. 100% of the company’s shares, leaving them wide open. to a painful short squeeze. Calvasina noted that some of the best-known trades made by individual investors over the past year – buying stocks in the middle of a recession, buying airlines and cruise lines last summer, and implementing small restrictions this winter – come from a playbook that was It has been largely abandoned by institutional investors over the past decade in favor of growth, momentum and quality investment strategies. At that point, very short names have outperformed the market since March 23 lows when it comes to small- and large-cap stocks, a development that generally occurs after the market has hit a mid-recession low, he noted. Still, the retail frenzy surrounding GameStop’s short contraction and a handful of other very short small-cap stocks lit a red flag for investors looking for the kind of foam that indicates a rally is entering some kind. euphoric phase. usually followed by a reverse. Next stage? While that may be the case in the short term, some investors argue that a sustained rally in active individual investment interest could help fuel the next stage of a bull market. Individual investors could continue to fuel interest in more value-oriented, lower-capitalization and higher-volatility names, Konstantinos said. And sustained interest in individual stocks could mean more “dispersion” or variation in returns between individual stocks and sectors, Clissold said, a missing item over the past decade to the pain of active fund managers. Calvasina argued that retail interest in specific stocks is likely to ebb and flow, as it has for the past year, but likely won’t go away. “Unless the door is closed (ie through a major regulatory change), we cannot see why the interest of retail investors in trade in specific names will completely disappear given the high level of cash on the sidelines among consumers “, wrote.