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March 27, 2021, 9:42 a.m. EDT

Will individual investors stick around after pandemic’s ‘mind-blowing’ stock trading surge?

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By William Watts

The U.S. bull market in stocks just celebrated its first birthday this week. Now the question is whether individual investors will remain the life of the party.

The numbers tell the tale. Long-dormant interest in active trading among individual investors had started to revive as a result of the race to zero commissions by major online brokerages. But it was the COVID-19 pandemic, and the resulting market collapse last February and March, that threw fuel on the fire.

It’s difficult to understate the surge in individual investor flows over the past year, which have been “just mind-blowing,” said Eric Liu, co-founder and head of research at Vanda Research, a firm that provides tactical macro and strategic investment analysis to institutional investors.

Those flows have run at four to five times the previous pace and continue to rise this year, he said in an interview, citing the firm’s flow-tracking data (see chart below).

Analysts have attributed the surge in activity to a number of factors, but many come back to the idea that investors left bored by lockdowns on business activity and a lack of opportunities to spend money, including last spring’s stimulus checks from the government, flocked to online brokerages.

Indeed, April 15 of last year, as stimulus payments arrived, marked the heaviest retail buying interest, Liu noted. Another big boost was seen on Jan. 6 as a round of $600 payments streamed in.

The question is whether individual investors will remain focused on the market as the U.S. economy reopens and the pandemic is eventually put in the rearview mirror.

The recent round of $1,400 stimulus checks that began hitting bank accounts earlier this month aren’t being thrown aggressively into the stock market, Liu noted, with net purchases by individual investors this past Monday coming in at the lowest level Vanda has seen all year.

The likely reason, Liu said, is that individual investor portfolios have had a tough month, underperforming the S&P 500 index by at least 11%. It’s clear from the data that when retail traders perform poorly, they’re reluctant to add to equity exposure, he said.

The latest round of stimulus checks are unlikely to get injected into the market “until we get a more pronounced turnaround in the sorts of tech/ESG names that constitute a large proportion of retail’s holdings,” he said.

The data offers an interesting look at how individual-investor activity evolved over the course of the pandemic.

There was a steady creep higher in trading activity into January and February of last year followed by heavy selling through the end of March as stocks made the fastest plunge from record levels to a bear market, defined as a pullback of 20% or more, on record. The bottom for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.97% came on March 23, 2020, marking what by some definitions was the beginning of the current bull market and, no matter how one slices it, an epic rebound that sees major stock indexes trading not far off all-time highs.

The S&P 500 on Tuesday finished 74.78% up from its bear-market bottom and the largest 12-month gain since 1957. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.96% rose 74.4% over the same stretch.

Also see: The new S&P 500 bull market is about to enter its second year. Now what?

After the March lows, it was “off to the races” for individual investors, albeit with peaks and valleys, Liu said. Buying interest was “really hot” in the spring of last year, with investors piling into companies that were reopening after the initial lockdowns in the spring. Interest in those stocks dissipated in the summer as a second wave of COVID infections hit, with investors rotating back into highflying large-capitalization technology stocks, then pulling out beginning in September.

A rush into electric-vehicle and ESG-oriented stocks (an acronym referring to environmental, social and governance criteria) followed in November, Liu said. The chart below breaks down the areas favored by individual investors over the course of the pandemic:

Individual investors now make up a much larger chunk of daily trading volumes. In fact, the share appeared to double from around 10% in 2019 to around 20% in 2020, said Shane Swanson, senior analyst at Greenwich Associates, in an interview.

/zigman2/quotes/210599714/realtime
US : S&P US
4,532.76
-44.35 -0.97%
Volume: 2.48B
Jan. 19, 2022 4:58p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,028.65
-339.82 -0.96%
Volume: 393.08M
Jan. 19, 2022 4:58p
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