Business

Retail investors enter a bull market that could fuel a populist backlash

Arguably, the bull market of 2021 is the same as the one that began in 2009, with a major twist. Retail investors, who sat on the sidelines for years, took the plunge after the pandemic-induced flash crash last year and since buy every discount with fervent enthusiasm. They not only represent a new group of investors but also a new voting block, increasing the risk of a populist backlash should one of the bear markets turn into a bear market. is different.

Remember that policymakers played a big role in starting this craze. With government support and fresh liquidity from central banks, investors are just starting to pour some of their earnings into the market, helping to fuel a bull cycle into its 13th year.

More than 15 million Americans trading app downloaded during the pandemic, and surveys show that many of them are young, first-time shoppers. Retail investors are also active in Europe, doubling their share of daily trading volume and in emerging markets from India to the Philippines.

All told, US investors alone poured more than $1 billion into equities worldwide in 2021, three times the previous record and more than the previous 20 years combined. After retreating a decade ago, American households have surpassed corporations to become the main contributors to net demand for stocks in 2020. They now own 12 times more stocks. compared to hedge funds.

Media coverage tends to peak at the most exciting times, such as when Robinhood Crowd went gaga for GameStop and other meme stocks last winter, but the craze never slowed. Retail investor interest, as measured by internet searches for popular market news and outlet deals, has continued to soar. U.S. households bought at a staggering rate throughout 2021, peaking in the third quarter as their holdings increased by more than 16% year-over-year. That new retail traffic level matches the previous record, set in 1963.

Alas, going back to the crash of 1929, a common feature of bull markets was that retail investors caught on too late. Today, they continue to buy even as people inside the company are selling in record numbers, with internal sales hitting $60 billion this year. And insiders have the opposite record: they tend to sell at the highest levels. If the market is volatile, a timely move by senior CEOs to mitigate risk will only encourage the resentment of smaller investors who fail to do so.

However, instead of advising cautiously, Democrats and Republicans, in a Rare bipartisan unity.

Another warning sign of impending trouble for the market is usury to buy stocks, or margin debt. Net margin debt in the US now amounts to 2% of GDP, the highest level since records began three decades ago. A big part of that is on retail investors’ tabs: their loans to buy stocks have grown by more than 50% in the past year, reaching record levels, just as they were before the 2001 and 2008 crashes.

Democratizing the market will be an incomparable benefit, if the risks are managed properly. The big players have never had a view of “smart money,” and that may be more true than ever, as internet technology has at least somewhat equalized access to market information for traders. Investments of all sizes. Retail investors are hardly the only ones showing signs of mania, which can also be seen in the IPO, merger and art markets.

But many retail investors are placing their bets on in a highly speculative way, for example by buying one day call option or stocks with low nominal value are easy to appreciate. It is a bizarre sign of the puzzling times to hear socialist political leaders attempt to defend extreme capitalist risk-taking by an investor class comprised of many high-income voters. average and lower entry.

The result is a market that is historically overvalued, over-owned, and to a perhaps unprecedented degree, politically combustible. Americans now have unusually high savings, and the proportion of their portfolios held in stocks is now comparable to an all-time high, dating back to 1950.

None of this necessarily foreshadows an impending crash. There is still a lot of liquidity around the system, and even some of the most sophisticated investors worry that there is no alternative to owning stocks with such low interest rates. But having done so much to inspire this retail investor frenzy, governments and central banks could face a backlash when the next bear market inevitably emerges.

Writer, chief global strategist at Morgan Stanley Investment Management, author of ‘The Ten Rules of Successful Countries’

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