The recent surge in retail stock buying from Robinhood-type brokers is so massive that it has temporarily replaced stock buybacks, which were responsible for the rally since 2009 while most retail investors sat on the sidelines, CNBC reported.
Analysts worried about the strength and lasting power of the market rebound since March 2020, when global stocks saw a downturn of at least 25 percent and 30 percent in most G20 countries. The S&P 500 has surged almost 40 percent since its low in March.
U.S. companies stopped buying their own shares to preserve cash during the coronavirus pandemic. However, retail investors have come in with so much buying power that they have sent stocks back up, almost to record highs.
Net corporate demand is expected to drop 80 percent to $100 billion this year as repurchases slow down, but increased retail demand will offset the decline by about $270 billion, according to Goldman Sachs Group Inc, Bloomberg reported.
“Broker data show a surge in retail equity trading activity,” strategists led by David Kostin wrote in a note to clients. “Foreign investors and households will supplant corporations as the largest 2020 source of U.S. equity demand.”
That’s a big change from the previous four years, when companies spent more than $2 trillion buying back their stocks, dominating every other category of investors, according to Federal Reserve data compiled by Goldman. During that period, households bought $41 billion of stocks, mostly in 2017, and overseas investors were net sellers, according to Bloomberg.
“The fear-of-missing-out has been fueling buying by day traders, such as those on the commission-free brokerage Robinhood, who pounce on companies with little or no profit and send their stock price surging,” Lu Wang wrote for Bloomberg. “With mom-and-pop investors opening record numbers of new trading accounts, Wall Street pros are trying to figure out to what degree retail appetite has become a self-fulfilling prophecy in many parts of the market and what risks it poses to the rally.”
We know the surge is mostly from retail, mom-and-pop, Robinhood-type funds. Brian Reynolds, chief marketing strategist at New Albion Partners, says the short-selling data show short covering is just a small piece of the inflows and hedge funds have been generally underperforming, CNBC reported: “What’s more, this is retail stock-picking. The ICI (Investment Company Institute) data don’t even show a surge into mutual funds or ETFs lately, suggesting this is people buying individual stocks.”
Small investors’ call-option buying made up more than 50 percent of total volume one week in early June, the highest since 2000, according to Sundial Capital Research Inc.
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That kind of enthusiasm worries some market observers, Wall Street Journal reported. In the late 1990s, small investors bought into unproved .com companies after the Fed slashed interest rates in 1998 during a financial crisis. The Nasdaq market collapsed in 2000.
“The key parallel between 2000 and today is that retail investors are seeing the stock market as a can’t-miss opportunity,” Michael O’Rourke, chief market strategist at JonesTrading, told WSJ.
Not everyone thinks Robinhood is moving the entire stock market.
Robinhood has 13 million accounts, “but a great many of those accounts are used by younger people. Younger people don’t have much money. It’s a great thing to see younger investors learning how things work, but relative to the scale of capital in the stock market, Robinhood’s user base is inconsequential,” David Butler wrote for The Motley Fool. “More than anything, the trades are drawing attention because of how concentrated they are in battered stocks.”
