Tales of out-of-work 20- and 30-somethings using coronavirus stimulus checks to scoop up stocks on Wall Street with reckless abandon are coming fast and furious, but the reasons behind the recent fervor for investing is, perhaps, far simpler.
A New York Post story cited Deutsche Bank analyst Parag Thatte as attributing much of the nearly 40% surge in the U.S. stock market since its late-March nadir to unexperienced small investors with a voracious appetite for risk. The analyst suggested that Wall Street professionals are being forced to chase amateurs who have bid up equities.
Tobias Levkovich, Citigroup’s chief U.S. equity strategist, in a research report last Friday asking whether the market was “Getting Bubblicious,” similarly surmised that investors were starting to chase performance, as Citi’s closely followed Panic/Euphoria index reached its most euphoric level since 2002, Barron’s Ben Levinsohn noted .
“There’s definitely a fear of missing out. That’s why people are chasing the market,” said Nick Maroutsos, co-head of global bonds at Janus Henderson Investors, in an interview with MarketWatch.
In a late-May Bloomberg podcast, Levkovich referred to that sentiment as not fear of missing out, or FOMO, but fear of meaningfully underperforming, or FOMU.
Are retail investors at the root of this?
Some have made the case that an era of zero-commission discount brokerage trades, ushered in by Charles Schwab /zigman2/quotes/201281754/composite SCHW +2.72% , and platforms like Robinhood that cater to younger investors, combined with a dearth of diversions due to COVID-19 lockdowns and unemployment, have created a perfect environment for newly minted day traders.
“It got too easy, and now we all have to suffer as the get-rich-quick crowd gets blown out,” CNBC’s Jim Cramer said on his “Mad Money” show on Friday , describing the current environment as one of “rampant speculation.”
The entry into day trading has never been as seamless as it was with “a large population of people looking for something to do that can set up an environment where there is a lot of retail speculation,” National Securities strategist Art Hogan told MarketWatch.
However, it’s hard to make the argument that mom-and-pop investors are leading a new dawn of investing on Wall Street, captained by the outspoken Barstool Sports founder Dave Portnoy, who has suggested that he’s better suited to the current investing environment than legendary long-range investor Warren Buffett.
A Financial Times story named Portnoy as prominent among a new breed of investors of the mind that stocks only move in one direction: upward. “Retail bros,” the FT calls them .
Historically, retail investors and those who day trade, in the grand scheme of things, represent a small portion of the overall trading on Wall Street, even if discount brokerages are seeing a spike in new accounts .
A recent research report from Barclays by analyst Ryan Preclaw concluded that retail investors are not behind the market’s enormous moves and noted that purchases on the Robinhood platform actually underperformed.
“Just because two things happen at the same time doesn’t mean one causes the other,” said Preclaw. “And while it’s true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase,” the analyst wrote (see attached chart).