A Changing of the Guard in the Market?

Retail accounts for 20% of total trading volume in the U.S., just shy of the 24% peak reached in early 2021 when meme stocks such as GameStop and AMC Entertainment entered the world stage.  Ever since then, retail investors have been resilient and fully participating in this rally.  For example, retail investors are pouring billions into low-cost index funds, while flocking to discounted stocks, such as Opendoor Technologies and Kohl’s.  Retail participation is twice as high as pre-pandemic levels.  Many of the retail investors are savvy and some of their behaviors reflect the same kind of worries that affect institutional investors.  Because of tariffs, retail investors have been investing in volatility-based products lately, such as 2x Long VIX Futures ETF, as a way to hedge their portfolios and protect against sudden market meltdowns.[1]  In addition, individual investors seem to follow a strong seasonal trend, trading briskly in June and July before dropping off by September when school reopens.  Fund managers, on the other hand, often step away for summer holidays.

Scott Rubner, Citadel Securities’ head of equity and equity derivatives strategy, has observed that mom-and-pop investors are market leaders this summer.  That spurred him to make an audacious call two weeks ago: he expects a solid run in the S&P 500 all the way until the Labor Day holiday in early September.  His prediction has panned out — so far.  Other Wall Street analysts are starting to recognize retail investors’ lasting impact, too.  In a recent note to clients, Goldman Sachs observed that historically, sharp increases in speculative trading signaled abnormally high returns within a one-year horizon.

Thus, it is possible that we are witnessing a structural change in the market.  With retail investors taking the lead, professionals must be pondering whether they should chase the rally, or possibly explain why their portfolios are underperforming.