S&P 500 5-Percent Rout Hammers Mom-And-Pop Investors Who’ve Piled In
Emboldened by a brokerage price-war, mom-and-pop investors doubled their trades in equities over the last several months and now they’re getting slammed after global markets on Monday pushed the S&P 500 down almost 5 percent, Bloomberg reported.
Individual investors aka “retail money” helped fuel a rally in stocks ranging from tech giants such as Tesla and Plug Power to small-caps. However, concern about a possible coronavirus helped cause the bull market’s biggest interruption in six months after a record close five days ago. Investors are being driven to exit risky assets for bonds and gold.
Tesla and Plug Power each fell by more than 6 percent. Both are tracked in Goldman’s basket of 50 most-popular stocks among individual investors. Overall, basket stocks fell 3.9 percent, the biggest drop since May. Just two did not decline, Bloomberg reported. Until this week, Goldman’s basket stocks had risen 13 percent in 2020 — almost four times as much as the S&P 500.
The stock basket has a long track record of beating the market in good times and bad, CNBC reported.
Two weeks ago, Goldman Sachs analysts predicted the economic impact of the coronavirus would be limited, hitting U.S. economic growth by up to 0.5 percent in the first quarter. “The impact of the lower global and U.S. economic activity on 2020 S&P 500 earnings per share will be limited,” they said, according to Marketwatch.
However, health officials say the virus has the potential to infect 60 percent of the global population and kill 45 million people if it’s not brought under control.
Economists and businesses worry about shortages of everything — a “supply shock” — where high demand and low supply force prices up.
Mutual funds and exchange-traded funds (ETFs) are common types of retail funds that are intended for ordinary investors.
The bull market, which turns 11 years old in two weeks, predates the recent increase in small-investor interest. The S&P 500 traded at 19 times forecast earnings last week — an all-time high and the highest since the dot-com era.
By the end of 2001, most dot-com stocks had gone bust. Even the share prices of blue-chip technology stocks such as Intel, Cisco, and Oracle lost more than 80 percent of their value. It would take 15 years for the Nasdaq to regain its dot-com peak, which happened on April 23, 2015.
Retail money or individual investors like to chase winners regardless of valuations and company fundamentals. Ten of the basket stocks gained more than 20 percent year-to-date including Plug Power, Tesla and Virgin Galactic. However, just two made profits in 2019.
Individual investors also love Apple, Amazon, Facebook and Microsoft, which “likely contributed to a top-heavy market that some strategists have warned is becoming hard to sustain,” Bloomberg reported.
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“The coronavirus may help demonstrate how quickly it can all come unraveled,” said Peter Cecchini, chief global market strategist at Cantor Fitzgerald LP.
Retail money was an indifferent participant for much of the 11-year bull market, according to Bloomberg. The surge in interest is attributed in part to brokerages cutting commission fees to zero and an equity rally that added $7.5 trillion in market values in 2019. Daily average trades at E*Trade and TD Ameritrade almost doubled to all-time highs since September 2019 according to data compiled by Sundial Research.
“History has shown that retail investors do respond to near-term volatility, so folks are rather fickle,” said Mike Skillman, CEO of Cadence Capital Management. “If we see an increase in volatility in the next several weeks, flows into the market will slow down, if not reverse.”