This is the main reason Robinhood traders have been able to push stocks higher, and no, it is not by squeezing hedge funds.


With the broader stock indices in a bit of a coma this week, the talk of the financial markets continues to be the awakening of retail investors to the US stock market.

World equities posted the largest weekly cash inflow in history, at $ 5.8 billion, Bank of America said, citing data from EPFR Global. Not all of that money comes from day traders, of course, but it is a sign of the frenzy. Michael Every, global strategist at Dutch bank Rabobank, raises an interesting question. “You only see how stable a system really is if it is logically pushed to the limit, which we are doing on multiple fronts,” he says. “How will it work if 50% of people decide to trade central bank liquidity daily in exchange for a free ride to prosperity?” He asks. “Obviously someone needs to cook and deliver pizzas to those merchants.”

That question, for now, will remain unanswered (and in any case, they’re chicken tenders, not pizza, for the Reddit WallStreetBets crowd). But new research work quantifies just how big the impact of the retail investment boom has been on the American stock market. Using account holdings data from Robinhood Markets and 13-F submissions from large portfolio managers, the researchers were able to estimate retail and institutional demand.

The impact was massive. Robinhood traders accounted for more than 7% of the variation in stock returns during the second quarter, the researchers found. Without the Robinhood crowd, the aggregate market capitalization of the smallest quintile of US stocks would have been more than 30% lower.

Robinhood moved a few well-known companies, long before the GameStop craze began. Ford Motor Co.’s F,
-2.64%
performance would have been 7.5 percentage points lower in Q1 2020 without Robinhood and General Electric merchants GE,
+ 0.53%
it would have fallen another 2.75 points. In the second quarter, Ford’s performance would have been more than 20 percentage points lower, and Delta Air Lines DAL,
-0.42%
and United Airlines UAL,
-0.78%
it would have been more than 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 part of the equity market is managed by institutional investors with inelastic demand curves in price,” said the researchers, Philippe van der Beck of École Polytechnique Fédérale from Lausanne and the Swiss Finance Institute, and Coralie Jaunin from the University of Lausanne and the Swiss Finance Institute.

Read the last sentence again and think about it. A large part of the stock market doesn’t care what the price is. Why should they? Very popular index funds seek to replicate indices, at any cost. Despite all the attention on short sellers, the Robinhood crowd can affect the price of large companies that are in the hands of passive institutional investors, the researchers said.

And while van der Beck and Jaunin focused their analysis on 2020, they did look at current events. Yes, the video game retailer GameStop GME,
-0.20%
and the AMC Entertainment AMC theater chain,
-3.28%
They saw extraordinary demonstrations as retailers organizing on Reddit’s WallStreetBets forum squeezed out hedge funds. But what about headphone maker Koss KOSS?
-6.41%,
with negligible short interest, which jumped from $ 4 to $ 110?

They applied their methodology to GameStop specifically. The purchase of 10% of GameStop’s outstanding shares could have led to a 57% increase in its share price, based on institutional ownership for July, the researchers said.

The buzz

Entertainment conglomerate Walt Disney Co. DIS,
+ 0.67%
increased 2% in pre-market trading as it reported a surprise fourth quarter profit as subscriptions to the Disney + streaming service rose to 94.9 million.

Datadog DDOG cloud monitoring service,
+ 1.77%
It fell 5% as it offered a 2021 outlook below Wall Street estimates. The cybersecurity company Cloudflare NET,
+ 0.41%
It fell 6% after its earnings forecast met Wall Street estimates.

Bausch Health BHC,
+ 1.79%
increased 5% in premarket trading as activist investor Carl Icahn acquired a nearly 8% stake in the generic drugmaker.

The finance ministers and central bankers of the Group of Seven will hold a virtual meeting, with a reading at around 10 am ET.

The University of Michigan Consumer Confidence Index highlights the economic calendar. The UK reported a 1% rise in gross domestic product for the fourth quarter, which nonetheless capped a 9.9% drop for 2020, the worst performance in more than 300 years. Read what happened 300 years ago.

The market

US stock futures ES00,
-0.21%

NQ00,
-0.14%
they were lower on Friday morning, with most of Asia closed for New Years celebrations.

The gap between the performances of the Italian TMBMKIT-10Y,
0.450%
and German TMBMKDE-10Y,
-0.447%
10-year bonds fell to the lowest level in six years when the 5-Star Movement overwhelmingly backed joining a government headed 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

This 2015 Vanity Fair profile of Whitney Wolfe Herd, now a billionaire after the online dating app Bumble’s BMBL, is worth checking out,
+ 63.51%
commercial debut on Thursday.

Red Wine, Champagne and Baked Alaska – The 117-year-old nun who survived COVID-19 celebrated in style.

These pigs can play video games and they are pretty good too.

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