Huge stimulus from central bank boosted markets in 2020, inflating asset prices
Retail traders have ridden 2020’s stock market rally better than the professionals, with their most popular picks outperforming market indexes and well-resourced investors such as hedge funds.
Online trading platforms have reported a retail rush since the COVID-19 pandemic hit markets in March, with near-zero interest rates and a rebound attracting a new generation of traders.
Huge stimulus from central bank boosted markets in 2020, inflating asset prices, often to record levels and particularly in U.S. tech.
Retail investors have picked the top performers, including Amazon, Tesla and Nio, as well as pharma hopefuls looking for a break in the COVID-19 vaccine hunt.
A basket of 58 U.S.-listed stocks popular with retail traders is up more than 80% this year, outstripping the S&P 500’s 14.5% rise and a hedge fund basket’s return of 40%, two Goldman Sachs-compiled indexes show.
Amateur traders have also piled into electric truckmaker Nikola, exercise bike maker Peloton and Zoom.
Market veterans draw comparisons with the frenzy in little-known internet stocks before the 2000 dotcom crash.
Of course it’s a bubble. But money is free, liquidity is high, it’s never been easier to trade for retail punters, there’s no savings rate or bond yield and everyone wants the bubble to pop, Mark Taylor, a sales trader at Mirabaud Securities, said.
Many of the stocks retail traders have been buying look expensive, based on the commonly-used price-to-earnings (P/E) ratio. The P/E ratio for stocks in Goldman’s ‘Retail Favourites’ index is deeply negative, as the companies lose money. For the ‘Hedge Fund VIP’ index, the ratio is 32.
Many institutional investors have poured cash into the same pumped-up shares, but they usually diversify.
Retail portfolios therefore have much weaker balance sheets, as shown by the net debt to operating profit ratio for Goldman Sach’s hedge fund basket of 1.8, against retail’s 4.8.
Stretched valuations and a concentration of retail investors in some stocks, Refinitiv data shows they own 20% of Tesla shares against 0.17% of Ford, could exacerbate a selloff if confidence in ever-rising prices wanes.