Let’s Light This Candle, Part II

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Let’s Light This Candle, Part II

We’re old enough to remember the last 2 times retail investors were noticeable parts of an equity market rally. The first one was in the 1980s, when mutual funds charged 5-8% upfront commissions and investors were happy to pay them just to have access to professionally managed portfolios. The next one was in the late 1990s, when dot com stocks caught the public’s eye and Ameritrade marketed directly to young investors with a goofy day trader named Stuart and his catchphrase “Let’s light this candle”.

Now we have a third bite at the apple, a combination of commission free trading from the likes of Robinhood and other online/mobile trading apps along with CARES Act checks and a lack of alternative stimuli due to work-from-home rules and dearth of sports/casino betting. Combine those with historic US equity market volatility and you have the makings of a new retail gold rush of sorts, with online brokerages seeing millions of new account openings in recent months.

This Google Trends chart shows the order of magnitude we’re talking about, basically 4x from pre-COVID to current day for search volumes related to “buy stocks”, “robinhood”, and “etrade”:

What is clear from that chart, however, is that this trend is largely exhausted. “Buy stocks” peaked the first week of March, with “robinhood” and “etrade” following suit the next week. Most who wanted into this party are through the door and at the bar. That’s pretty textbook behavior in terms of Google Trends’ predictive powers: first, users search a generic term and then they look for venues to purchase the good or service in question. We’ve seen the same behavior with cryptocurrencies over the many years we’ve covered that space.

Speaking of cryptos, one might wonder how the recent flurry of interest in “buy stocks” and the other Google searches mentioned above compare to the great bitcoin rush of late 2017. As the chart below shows, there’s really no comparison. Even during March’s peak interest in “buy stocks”, US queries for that term were less than 10% of “bitcoin” searches in mid-December 2017. Considering that the same youngish investor that now has a Robinhood account was also likely playing cryptos in 2017, this math says the current wave of interest in stock trading isn’t all that impressive.

There’s been a lot of press about how these new traders are skewing stock prices, with the nonsensical action in bankrupt Hertz seemingly Exhibit A. The truth is somewhat different, however. The 20 names Robinhood traders have been most actively buying over the last 30 days actually fall into three buckets:

  • Classic deep value cyclical plays: American Airlines (3rd most accumulated name in terms of number of accounts which hold), Delta (6th), Spirit (8th), Invesco Mortgage (10th), MGM (11th), GE (14th), United (15th), Ford (16th) and Norwegian Cruise (20th).
  • Peter Lynch style “buy what you know” names: Amazon (7th), Apple (9th), Tesla (12th) and Disney (17th).
  • Speculative trades that border on lottery tickets: Genius Brands (1st), Nikola (2nd), TOP Ships (5th), XpresSpa (13th), a 2x leverage oil/gas ETF (GUSH, 18th) and OrganiGram (19th). And, of course, Hertz (4th).

On the plus side, that’s a 13:7 ratio of reasonable names to not-so-thoughtful, which shows there are plenty of Robinhood traders making reasonable choices. On the downside, well into the bull market the top of this 30-day accumulation leaderboard is still full of questionable names.

Wrapping this up with a few closing thoughts:

#1: This is not 1999, at least not yet. Yes, there are echoes. But the Google search data shows the rush of new investors/traders is already waning. Once sports betting comes back online, we suspect it will decline even further.

#2: The other dissimilarity to the late 1990s is that there is no unifying theme to the speculative trading we’re seeing aside from low stock prices. Enthusiasm over Internet 1.0 drove almost all the retail investor misallocation of capital in the late 1990s. Now, the spec trades are a jumble of low-quality names with nothing in common aside from a sub $5 stock price or a one-off story.

#3: There are plenty of reasonable names at the top of the Robinhood “fresh money buy list” that any hedge fund would likely own and several that feature prominently at the top of the S&P 500. The last few months of new retail investor interest has not entirely been a dash for trash.

Bottom line: there are plenty of reasons to be cautious on stocks here, but retail investor enthusiasm is far down the list once you actually look at what they are buying and put their actions in historical context.