Retail investors surfing bull market could spark populist backlash

Arguably the 2021 bull market is the same one that started in 2009, with one big change. Retail investors, who have been on the sidelines for so many years, rushed after the pandemic-induced flash crash last year and have since bought every trough with growing enthusiasm. They represent not only a new cohort of investors, but a new voting bloc, increasing the risk of a populist backlash if one of the dips turns into another bear market.

Remember that policymakers played a big role in triggering this craze. Armed with supportive checks from the government and fresh liquidity from central banks, new investors began to pour part of their income into the markets, helping to boost the bull run in a 13th year.

More than 15 million 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.

In total, U.S. investors alone invested more than $ 1 billion in stocks around the world in 2021, three times the previous record and more than the previous 20 years combined. After declining for the past decade, US households have overtaken corporations as the main contributors to net demand for equities in 2020. They now hold 12 times more equities than hedge funds.

Media coverage tends to peak at the wackier times, like when the Robinhood crowd went gaga for GameStop and other meme stocks last winter, but the excitement never slowed down. Retail investor “interest”, as measured by Internet searches for popular market news and outlets, continued to soar. U.S. households bought at an astonishing rate throughout 2021, peaking in the third quarter when their holdings of equities increased by more than 16% from the previous year. This level of new retail flows matches the previous record set in 1963.

Sadly, going back to the crash of 1929, one of the common characteristics of bull markets is that retail investors get hold of them too late. Today, they continue to buy even as corporate insiders sell record amounts, with insider sales exceeding $ 60 billion this year. And insiders have the opposite result: they tend to sell to the strongest. If the market were to turn sharply, the fact that top CEOs decided to reduce their risk in time will only encourage outrage among small investors who did not.

Instead of advising caution, however, Democrats and Republicans, in a rare display of bipartisan unity, applauded the “democratization” of the markets and defended the right of Americans to freely speculate in the actions of memes – even if it did. seems irrational.

Another harbinger of impending turmoil in the markets is massive borrowing to buy stocks or margin debt. Net margin debt in the United States now stands at 2% of GDP, a record since the record highs began three decades ago. Much of it is borne by retail investors: Their borrowing to buy stocks has risen by more than 50% over the past year to record highs, just like before the crashes of 2001 and 2008.

The democratization of the markets would be an unadulterated good, if the risks were managed wisely. Big players have never had access to ‘smart money’, and this is perhaps truer than ever, as internet technology has at least partially equalized access to market information for investors. of all sizes. Retail investors aren’t the only ones showing signs of insanity, which are also visible in the IPOs, mergers and art markets.

But many retail investors place their bets in a highly speculative manner, such as buying overnight call options or low face value stocks that are easy to raise. It’s a surreal sign of a confusing time to hear overtly socialist political leaders championing extreme capitalist risk-taking by an investor class that includes many low- and middle-income voters.

The result is a historically overvalued, over-owned and, to an perhaps unprecedented extent, politically flammable market. Americans now have an unusually high level of savings, and the portion of their portfolios they hold in stocks is now an all-time high, dating back to 1950.

None of this necessarily signals an impending crash. There is still a lot of liquidity flowing through the system and even some of the most sophisticated investors worry that there is no other option but to own stocks with such low interest rates. . But after doing so much to inspire this retail investor fad, governments and central banks could face a major backlash when the next bear market inevitably arrives.

The writer, chief global strategist of Morgan Stanley Investment Management, is the author of “The Ten Rules of Successful Nations”

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