Individual investors are back – here’s what it means for the stock market

See who is behind

After a long absence, active individual investors have returned with a vengeance. And while GameStop Corp. GME can be true to some extent,
+ 19.20%
The saga is the big question for investors of all leases, whether there will be a clear resurgence on the retail trade front and what it means for the stock market as the US benchmark index marches at all-time highs.

it’s been a long time coming.

Stocks saw the strongest bull market in history “without a major retail interest” since the 2008 financial crisis, said Chris Constantino, chief investment strategist at Riverfront Investment Group, in an interview.

He said that total bond fund inflows have outpaced stock flows since 2007 of about $ 3 trillion. In fact, individual investors showed interest in almost anything else, from real estate to cryptocurrency.

The coronovirus epidemic underwent a change last year. Sequential growth in accounts of brokers such as Charles Schwab Corp. SCHW
+ 0.98%
The end of the second quarter of 2020 was “notable” for individual investors and following a major increase in growth in the following quarter, Lori Calvasina, head of US equity strategy at RBC Capital Markets, said in a Feb. 2 note.

At the same time Google “day trading” searches were also increasing, he noted (see chart below).

RBC Capital Markets

Calvasina and others acknowledged that a combination of a lockdown-related boredom and stimulus investigation from the US government played a role in increasing personal investment interest.

The jury has said what will accelerate the interest of the retail business, said Ed Klissold, chief US strategist at the Ned Davis Research Group, in an interview. It is unclear how much of the pick in retail trade only reflects individuals throwing extra money through incentive checks in the market, he said.

That type of business feels more like gambling than investment, he said, noting that “false” market action quickly fades.

But others argued that individual investors were likely to be around.

‘Structural change’

Calvacina said RBC suspects “structural changes may occur and retail investors are likely to remain major players in the US equity market.”

If so, an approach adjustment would be required by Wall Street professionals who have a habit of paying little attention to individual investors.

Ultimately, powerful waves of passive and systematic investment had made individual investors irrelevant to analysts ripping mass market forecasts, strategists at Societe Gennarele wrote in Thursday’s note.

Analysts said that GameStop’s position has led to market volatility.

While GameStop and other hefty names grew, hedge funds and other investors were seen holding positions elsewhere for long periods, to take advantage and cover losses, putting pressure on equity markets. The major benchmark ended on a sour note in January, with the Dow Jones Industrial Average DJIA,
+ 0.30%,
S&P 500 SPX,
+ 0.39%
And the Nasdaq Composite Comp,
+ 0.57%
Registering their biggest weekly decline since October.

See: ‘My family won’t let me go hungry’: Two young businessmen reveal the dangers of trying to surf the epic wave of GameStop

US stocks bounced back in the past week, however, with Gametop dropping more than 80%, scoring an all-time high with the benchmark.

need to know: Gametop’s meteorite benefits have almost completely vanished – here’s advice for those who didn’t get out on time

SocGen analysts saw the incident as part of a broader trend that has led to individual investors seeking investment keeping environmental, social and corporate governance, or ESG, standards in mind.

“Instead of criticizing retail investors and their behavior, it is better to turn them into an equation of money,” he wrote. “Ultimately, it is not only office workers who are closed at home on icy days, but also very active day traders with access to affordable platforms.”

Cabin fever is hardly considered the only factor by individual investors, who show renewed interest in the market, whose ranks are not simply made up of fast-fire day traders.

Leveling the field

Some individual investors, previously distanced from equities, may eventually succumb to the notion that ultralow yields on bonds and elsewhere leave little choice for the stock market. Konstantinos said that equity still looks attractive when it comes to dividends or earnings.

In addition, there has been a level playing field between institutional and individual investors over the past few decades. Regulation FD (for ‘full disclosure’) and other regulatory changes, as well as the rise of low-fee trading platforms, called for individual investors “to come closer to institutional investors than at any time in history.”

In fact, some market watchers have argued that the traditional branding of individual investors as “dumb money” is increasingly misguided, especially after the Gametop episode that supposedly “smart money” investors to the company’s Leaving them wide open, showing a decrease of over 100% of the stock. For a painful squeeze.

The frenzy in retail trading engulfed a small squeeze on GameStop, and other smaller heavy-cap stocks flagged off investors as a sign of a commonly followed type of quarrel. Investors see a red flag. By a pullback.

Front leg?

While this may prove to be the case in the near term, some investors take advantage of the continued pickup in active personal investment, which may help fuel the next phase of a bull market.

Konstantinos said that individual investors could generate interest in names with more value-oriented, smaller capitalization and higher volatility.

And continued interest in individual securities could mean more “spreads,” or differences in returns between individual stocks and sectors, Clissold said – an element that was missing from the pain of active fund managers for the past decade.

Calvasina argued that retail interest in specific shares is likely to ebb and flow, as it has done in the past year, but probably won’t go away.

“Until the door closes (i.e. through a major regulatory change), we fail to see how investors’ interest in the specific names of the retail business will be fully offset, given that cash among consumers How it has grown, ”he wrote.