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Arguably, the bull market of 2021 is the same one that started in 2009, with one big change. Retail investors, who sat on the sidelines for so many years, rushed in after the pandemic-induced flash crash last year and have since been buying every dip with mounting enthusiasm. They represent not only a new cohort of investors but a new voting bloc, increasing the risk of populist backlash should one of the dips turn into another bear market.
Remember that policymakers played a big role in starting this craze. Flush with government support cheques and fresh liquidity from central banks, new investors began pouring part of their income into markets, helping to turbocharge the bull run into a 13th year.
More than 15m Americans downloaded trading apps during the pandemic, and surveys show many of them are young, first-time buyers. Retail investors have also been hyperactive 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 $1tn into equities worldwide in 2021, three times the previous record and more than the prior 20 years combined. After retreating last decade, US households overtook corporations as the main contributors to net demand for equities in 2020. They now own 12 times more stock than hedge funds.
Media coverage tends to peak at the zaniest moments, such as when the Robinhood crowd was going gaga for GameStop and other meme stocks last winter, but the craze never slowed. Retail investor “interest”, measured by internet searches for popular market news and trading outlets, has continued to climb skyward. US households bought at an astonishing pace throughout 2021, peaking in the third quarter when their stock holdings rose by more than 16 per cent over the previous year. That level of new retail flows matches the prior record, set in 1963.
Alas, going back to the crash of 1929, one common feature of bull markets is that retail investors catch on too late. Today, they continue to buy even as corporate insiders are selling in record amounts, with insider sales topping $60bn this year. And insiders have the opposite record: they tend to sell at the peak. Should the market turn sharply, the fact that high-profile CEOs moved to reduce their risks in time will only serve to encourage outrage among smaller investors who did not.
Instead of counselling caution, however, Democrats and Republicans, in a rare bipartisan show of unity, have cheered the “democratisation” of markets and defended the right of Americans to speculate freely on meme stocks — even if it seems irrational.
Another warning sign of impending trouble for the markets is heavy borrowing to buy stocks, or margin debt. Net margin debt in the US now amounts to 2 per cent of GDP, a high since records began three decades ago. A large chunk of it is on the tab of retail investors: their borrowing to buy stock rose by more than 50 per cent over the past year to record levels, much as it did before the crashes of 2001 and 2008.
Democratisation of markets would be an unalloyed good, if the risks were managed sensibly. Big players never had a corner on “smart money”, and that may be more true now than ever, since internet technology has at least partly equalised access to market intelligence for investors of all sizes. Retail investors are hardly the only ones showing signs of mania, which are also visible in the markets for IPOs, mergers and art.
But many retail investors are placing their bets in a highly speculative way, for example by buying one-day call options or stocks with low nominal value that are easy to lever up. It is a surreal sign of confusing times to hear avowedly socialist political leaders defend extreme capitalist risk-taking by a class of investors that includes many lower and middle-income voters.
The result is a market that is historically overvalued, over-owned and to a perhaps unprecedented extent, politically flammable. Americans now have an unusually high level of savings and the share of their portfolios that they hold in stocks now matches the all-time high, going back to 1950.
None of this necessarily portends an imminent crash. There is still plenty of liquidity sloshing around the system and even some of the most sophisticated investors fret that there is no alternative to owning stocks with interest rates so low. But having done so much to inspire this retail investor mania, governments and central banks could face a major backlash when the next bear market inevitably arrives.
The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
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