Retail investors have dominated the markets in recent weeks—and aren’t likely to go away soon. That has a few implications for stocks.
In January, retail traders drove up the prices of heavily shorted stocks, while forcing short sellers to buy back their shares and market makers to take action to protect themselves. The resulting actions helped drive the S&P 500 down 3.3% last week, even as stocks like GameStop soared.
The market has returned to “normal” this week, but retail trading isn’t expected to go anywhere. In 2020, 19.5% of all dollars flowing into U.S. stocks were from retail traders, up from 14.9% in 2019, according to data from UBS Global Wealth Management. The only other participant type to increase its share of total order flows in 2020 was the high-frequency trader.
The biggest drivers of the retail activity according to RBC: Stay-at-home orders and direct payments to households. The government has deposited hundreds of billions of dollars into the bank accounts of Americans, who—uncertain about employment until Covid-19 vaccines fully reopen states—are saving and investing most of the money. The volume of posts on WallStreetBets popped a bit after the first round of stimulus checks in May 2020, but soared about ninefold after this January’s stimulus checks. And as long as Americans keep getting checks, they’ll likely remain engaged with the market.
“We believe a structural change may be afoot and that retail investors are likely to remain bigger players in the US equity market going forward,” wrote Lori Calvasina, chief U.S. equity strategist at RBC in a note, citing household’s cash levels as a key driver.
The data backs her up. Americans saved 13% of their income in December, down from 2020s peak, but still higher than a long-term average of 7.5%, according to Morgan Stanley economists. Plus, more fiscal stimulus is potentially on the way, which will only increase the amount of money available for people to put into the market.
To be sure, current economic expectations hardly support the thesis that retail traders will have tons of money for stocks for a long time. Economists expect households to spend much of the savings when and if reopenings bring consumer confidence back to pre-pandemic levelsSo while Calvasina calls the retail enthusiasm “structural,” it is possible that it reverses itself within a year as the economy reopens.
Still, as long as retail money still flows in, demand for stocks has one level of support for a market that “has a problem in the form of frothy sentiment,” Calvasina notes.
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