- Bullish sentiment has returned significantly among retail investors.
- Like the memetic stock boom of 2021, investors are opting for riskier speculative assets despite suffering the biggest losses in the rising interest rate environment last year.
- Strategists warn that the frenzy may be misinterpreted given that the Fed claims further rate hikes are on the way.
Retail investors are partying like they are in 2021.
The everyday traders who fueled the memetic stocks frenzy two years ago are back and are helping to push stocks higher after a dismal 2022, defeating Fed Chairman Jerome Powell’s hardline stance.
Retail investors are spending a record $1.5 billion per day on stocks this year, with the S&P 500 up nearly 5% year-to-date and the Nasdaq 100 up more than 11%, according to Vanda Research.
The bullishness coincides with last year’s memetic stock frenzy, but the macroeconomic picture doesn’t look much different.
Bullish Sentiment and Dark Economic Outlook
Plentiful of government stimulus and rock-bottom interest rates, retail investors early in the COVID-19 pandemic were betting big on a handful of struggling companies like GameStop, AMC and Bed Bath & Beyond. These bets ended in heavy losses for some hedge funds who were squeezed when they tried to short these names.
But shortly afterward, retail investors exited the market at a breakneck pace as inflation picked up, central banks raised interest rates, and risk appetite evaporated. Those who remained endured a brutal rout in 2022.
But fast forward to the last few weeks of the month and it looks like a cohort of retailers is back, armed with a record $1.8 trillion in cash piercing their pockets. If you include $3 trillion in money market funds held by institutional investors, that number swells to nearly $5 trillion, according to Fundstrat’s Tom Lee.
Gene Goldman, chief investment officer at Cetera Investment Management, told an insider that retail investors bid on stocks in January as optimism about a soft-landing economy grew.
“In the face of these headwinds, retail investors are probably jumping into false optimism,” Goldman said, adding that the market is pricing in the possibility that an economic recovery will materialize much later than expected. added.
DataTrek Research this month highlighted that the New York Fed’s recession probability model sets the recession chance at 57%. This is his highest since the early 1980s.
“Perhaps a Fed-induced recession should lead to a Fed-induced recovery, so no one seems to care,” said Nicholas Kolas, co-founder of Datatrek.
speculative betting is back
Some of the things retail investors are buying have bothered observers. Analysts say they are deliberately provoking the Fed by upending markets as the riskiest assets rise in the face of central bank efforts to stifle market frenzy.
Marko Kolanovic of JP Morgan recently said, “There’s an old adage, ‘Don’t fight the Fed,’ but this action goes beyond just fighting. Cryptocurrencies, memetic stocks and unprofitable companies are the ones most responsive to Fed communications. You’re mocking the Fed for that,” he wrote. Note.
Cryptocurrencies, electric car companies and speculative growth stocks, which suffered the biggest losses last year, have risen in early 2023. Bitcoin, for example, rose about 48% in his seven weeks, while Tesla regained almost all of his 2022. A loss with a 70% rise on the same stretch.
However, unlike 2021, institutional and retail investors appear to be on the same team, at least to a noticeable degree.
Bridgewater almost tripled its stake in GameStop and AMC in Q4 2022, while Steven Cohen’s Point72 hedge fund also bets on GameStop to build $108 million stake in Tesla The filing shows that it did. Billionaire George Soros, meanwhile, held sizable positions in the Rivian and Peloton.
Also new this year is AI hype trading. This mirrors his FOMO trading during the meme stock era. Since ChatGPT, OpenAI’s language bot, went viral, investors have been clamoring to take advantage of the hot tech, sending stocks of everything from chip makers to obscure tech names sky-high in a gold rush to early I’m looking for something vaguely related to space.
The Federal Reserve will not bail out stocks
After all, good news for stocks is still bad news.Employment data, consumer spending and inflation all tell us Federal Reserve hasn’t finished raising ratesFor JP Morgan’s Kolanovich, retail investor optimism foreshadows future weakness in the stock market as weak hands are swept away by volatility, similar to how 2022 unfolds.
As the Federal Reserve (Fed) continues to firm up its policy of tightening monetary policy, retail investor enthusiasm for risky assets could backfire, as it did last year. The possibility of a recession is still real, and overinvesting in speculative bets is a surefire way to feel the recession’s claws and lead to another period of hibernation.
“The bear market rally that started in October, which started with affordability and low expectations, prompted the Fed to pause and pivot,” said Mike Wilson, chief information officer and chief U.S. equity strategist at Morgan Stanley. It has turned into a grounded speculative frenzy.”
He expects U.S. stocks to fall more than 20% in the coming months, citing the blazing rally in early 2023 as being too hot.
Of course, the great irony is that the day trader’s triumphant return has led to a very excessive extension, making put stocks a very volatile place.