Retail traders leave Wall Street for dust in 2020 stocks rally

Author: Agencies

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 roaring rebound luring a new generation of stuck-at-home traders wanting to sharpen their skills on stocks. And while the scramble into fast-growing but highly-valued stocks has echoes of the 2000 dotcom bubble, plentiful cheap cash means retail traders do not yet look ready to cash in.

COVID-19 WINNERS

Record sums of central bank stimulus have turbocharged markets in 2020, inflating asset prices, often to record levels and particularly in US tech.

Retail investors have picked the biggest beneficiaries, including Amazon, electric vehicle makers Tesla and Nio, as well as pharma hopefuls looking for a break in the COVID-19 vaccine hunt.

A basket of 58 US-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, which is yet to sell a truck, and big lockdown winners in 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, its 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.

AT A STRETCH

Many of the stocks retail traders have been buying look expensive, based on the commonly-used price-to-earnings 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.