Tuesday, February 2, 2021
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The little guy has been beating the big guys for months.
At the bottom of the GameStop/Reddit/Robinhood retail trading saga sits one important question: What does it all mean for markets going forward?
As Sam Ro highlighted in Monday’s Morning Brief, initial indications from big investors are that it’s too early to tell. A survey conducted by Deutsche Bank last week revealed a split, noncommittal view from 700 of the firm’s clients.
But whether retail investors can hang with the market’s heavy hitters appears to have a better answer.
And that answer is yes.
In a note to clients published over the weekend, David Kostin and the equity strategy team at Goldman Sachs highlighted that since the March 2020 low, retail investors have outperformed both the broader market as well as hedge fund investors. And handily.
“A basket of retail favorites has returned +17% YTD and +179% since the March 2020 low, outperforming both the S&P 500 (+72%) and our Hedge Fund VIP list of the most popular hedge fund long positions (+106%),” Kostin writes.
But short squeezes, as Kostin notes, are not new. It’s just not common that they’re as extreme as what’s broken out in this market. And rarely are retail traders swept up in this kind of action.
“The past 25 years have witnessed a number of sharp short squeezes in the U.S. equity market, but none as extreme as has occurred recently,” Kostin writes. “One key difference between the typical short squeeze and the recent rally in heavily-shorted stocks is the degree of involvement of retail traders, who also appear to have catalyzed sharp moves in other parts of the market.
“Last week we discussed the surging trading activity and share prices of penny stocks, firms with negative earnings, and extremely high-growth, high-multiple stocks. These trends have all accompanied a large increase in online broker trading activity.”
In a separate note to clients published last week, strategists at JPMorgan led by Dubravko Lakos-Bujas concluded that the amped-up participation of retail investors in this market is “not exhausted given multiple rounds of stimulus, excess savings, expanding labor market, low consumer debt service ratio, and rising home equity.”
The firm added that, “lockdowns and a scarcity of substitutes to spend cash is likely resulting in higher-than-usual retail stock market participation for the time being.” And while retail investors do tend to favor momentum stocks, JPMorgan notes that retail’s participation is “much broader” across asset classes and investment styles when compared to the 1990s boom in trading.
It appears, then, that the view this period of enthusiasm must end badly because retail is piling into a few pie-in-the-sky names — a warning uttered so often by veterans of the tech bubble over the last week — appears to run counter to what the facts say about this current generation of small-time trader.
And news on Monday that Robinhood raised an additional $2.4 billion to help “build for the future and continue to serve people through the exponential growth we’ve seen this year” doesn’t suggest this retail frenzy is a frenzy at all.
But rather that this new era for the stock market is just getting started.