Retail Investors Almost Back to Even Despite Bull Run, Making Same Mistakes Again
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After over two years, retail investors, also known as the are almost back to breakeven.
A recent chart by Vanda Research shows that the average retail investor portfolio still sports a drawdown despite the markets making new all-time highs.
Avg Retail Investors Portfolio
Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the
The chart below shows the versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the
Dumb Money Index vs S&P 500
The difference between and investors shows that, more often than not, the invests near market tops and sells near market bottoms.
Dumb Less Smart Money vs S&P 500
We can confirm the analysis by looking at the allocations of retail investors in stocks, bonds, and cash.
With markets overvalued and hitting all-time highs, it is unsurprising that retail investor equity allocations are at very high historical levels with low holdings of cash and bonds.
AAII-Retail-Investor Stocks, Bonds, and Cash
Of course, it isn’t that retail investors are chasing the markets higher; it is what the is chasing that is most interesting.
Chasing The Russell 2000
Last week, I discussed the relationship between the NFIB data and the Russell 2000 index. As I noted:
Small Mid-Cap Index vs S&P 500-2014-Present
We see that exuberance in capital inflows into small-capitalization companies following the 2020 stimulus checks, which fueled an entire generation of traders on Reddit and the Robinhood app.
The hopes for quick riches from a small-cap stock along with a lot of hype on social media apps, has increased the speculative craze.
Retail Flows
At the same time, to leverage their bets, these retail traders have piled into call options.
The risk with speculative call options is they are either a or a complete Therefore, the speculative risk in trading options is dramatically higher than buying the underlying companies.
Interest Over Time
However, retail investors are directly piling money into small-cap stocks, as shown by increasing weekly inflows.
Small-Cap Flows
Particularly into small-cap growth stocks versus value, with a substantial acceleration starting in November 2023 and increasing in 2024.
Small Cap Growth
As noted above, this degree of speculative risk-taking by retail investors has always ended badly. This is why the financial market considers retail investors as
Of course, this brings us to whether investors are again making the same mistakes.
A Small Problem May Turn Out To Be Big
Over the past decade, the Fed’s ongoing interventions have led to a massive increase in the leveraging of U.S. corporations.
Of course, with repeated financial interventions combined with a zero-interest policy, why would corporations increase the use of cheap debt?
Corprate Debt vs GDP
The increased debt load doesn’t provide an inherent risk for large capitalization companies with massive revenues.
However, for small-cap companies, it is a very different story. Weaker economic growth continues to increase in the number of What is a in the financial world? To wit:
.
” –
The chart below from our friends at shows the problem facing the ” crowding in small caps.
Percent Of Russell-2000 Firms With Negative Earnings
With nearly 40% of the Russell 2000 index sporting negative earnings, many have issued debt to sustain operations.
Unlike many companies in the S&P 500 that refinanced debt at substantially lower rates, many of the Russell 2000 were unable. The risk is that if higher interest rates remain when that matures, such could further impair survivability.
S&P 500 Debt Maturing
Interestingly, since the beginning of the year, we are seeing borrowers return to the market for refinancing.
As shown, there has been a surge in B-minus rated borrowers, who are already taking on debt at higher rates to refinance old debt. While we are very early in the cycle, the risk to underlying balance sheets is rising.
US Institutional Loan Volume
As we concluded previously:
At the moment, the is chasing momentum amid a bullish frenzy. Unfortunately, such will likely again prove disappointing when expectations eventually collide with fundamental realities.
