Tuesday, June 9, 2020
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Big money is chasing small money in the stock market
The stock market’s recent rally has been historic.
And a new wrinkle in this market narrative is the large role that retail traders appear to be playing in driving this rally.
In a note to clients published on Friday, Deutsche Bank strategist Parag Thatte looked at investor flows and positioning and found most investors still have record low exposure to equities save for one group: retail investors.
Thatte writes that there is “plenty of evidence that new retail investors raised exposure through the selloff and the rally, unexpectedly so, and institutional money across the systematic as well as discretionary spaces is now chasing.”
Thatte cites data from Robintrack — which tracks portfolio changes on Robinhood — as a sign that retail is more broadly participating in this market, with the average number of accounts holding megacap growth stocks rising more than 50% during this crisis period.
Last month, analysts at Goldman Sachs also highlighted the surge in new accounts opening at Robinhood and said the “continued surge in retail investor trading activity has helped boost the growth stocks most popular with hedge funds.”
As of May 21, Goldman’s basket of stocks most popular with retail investors had outperformed the S&P 500 by 13% year-to-date.
Meanwhile, Deutsche Bank’s data shows that while exposure to the equity market across strategies has risen off record lows it remains in the bottom decile of its historical range. In other words, there is still plenty of skepticism about this stock market rally while retail investors appear unabashedly enthusiastic.
Additionally, Thatte notes that even this reading is skewed by crowding the firm has seen into mega cap growth stocks — think your FAANG names, Microsoft, Visa, chip stocks, some health care — with tech’s predominance as a preference for investors continuing unabated through this crisis period.
As readers of the Morning Brief are familiar, the recent surge in the stock market has coincided with persistent questions about the market and the economy telling what appear to be completely different stories about the state of this current crisis.
And this retail trader vs. professional investor tension is yet another conundrum for an industry that had seen retail’s influence in the market steadily decline since the tech bubble.
Marc Rubenstein, author of the financial newsletter Net Interest, noted last week that in 2001, retail exposure to the market peaked at 21% of households owning shares; this had declined to 14% over the Past two decades. Recent data, however, suggests to Rubenstein that this trend may indeed by turning.
I’ve also argued that retail’s enthusiasm for this market shouldn’t be completely surprising given how cleanly the widespread, simple investing maxim of “buy low, sell high” fits this crisis.
And of course, the future of this retail enthusiasm and whether it plays a role in future market rallies or declines remains to be seen.
But it is yet another new dynamic at play in a market that has remained consistently surprising to many for several months now. And a trend to be ignored at your peril.
What to watch today
6 a.m. ET: NFIB Small Business Optimism, May (92.2 expected, 90.9 in April)
8:30 a.m. ET: Wholesale Inventories month-on-month, April final (+0.4% expected, +0.4% prior)
10 a.m. ET: JOLTS Job Openings, April (5750 expected, 6191 in March)
6:40 a.m. ET: Tiffany & Co (TIF) is expected to report an adjusted loss per share of 27 cents on $611.86 million in revenue
Other notable reports: Signet Jewelers (SIG)
4:10 p.m. ET: Chewy (CHWY) is expected to report an adjusted loss per share of 4 cents on $1.53 billion in revenue
Other notable reports: GameStop (GME)
European markets dip despite Nasdaq hitting record high [Yahoo Finance UK]
Fed expands Main Street loan program with lower minimum amount, extended term [Yahoo Finance]
The US economy is officially in recession [Yahoo Finance]
Venture-backed car sale site Vroom to accelerate IPO [Bloomberg]
SoftBank-backed Lemonade files IPO saying ‘We love insurance’ [Bloomberg]
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