We usually dedicate part of Wednesday’s Data section to US retail investor fund flows, but today we’ll take a step back and do that plus address a few other more general issues related to this cohort.
#1: This chart of Robinhood’s account growth since 2013 speaks to 2020’s surge of new US retail investors. Total funded accounts grew by 145 percent to 12.5 million last year. Q1 2021 saw further growth, to 18.0 million. Account balances are small (average of $4,496 as of Q1 2021), but activity is strong enough that Robinhood generated $23 per funded account in transaction-based revenue during Q1.
All this speaks to a large, active base of retail investors that were largely absent pre-pandemic. Robinhood ran the time-tested disruptor playbook of targeting users who had been under- and unserved by traditional retail brokerage firms, who traditionally market to more affluent customers. That strategy, plus last year’s market volatility and aggressive fiscal stimulus, created both a virtuous circle for the company and millions of new investors in US equities.
#2: Did US retail investors buy Monday’s dip and is that going to keep happening over the rest of 2021 every time we get a large 1-day drop?
To answer that question, here is a 7-day hour by hour chart of US Google searches for “dow jones”. Over the years we’ve found that this is the most used US search term for anything stock market related. Interest spikes when stocks decline quickly enough for retail investors to notice, and then drops when markets go quiet again.
The data here shows that yes, retail investors took note of Monday’s decline (peaking at 1pm East Coast time, as noted) and were most engaged right after Tuesday’s open (peak of 100 at 10am). Both those days showed 2x the interest of the prior Thursday and Friday. Today’s interest levels (the last hump on the right) were lower, but still above last week’s levels.
As for how long retail investors can “buy the dip”, the short answer is they still have a lot of cash on the sidelines. We showed you Retail Money Fund balances last week (link below in case you missed it), which still stand at $1.0 trillion versus $643 billion in 2015. These balances tend to ebb and flow across market cycles, peaking as stocks trough and declining as equity markets recover. Simple math (based on 2015’s trough) says there’s about $400 bn of sideline, “buy the dip”, cash that can enter the market on pullbacks.
Before we get to our last point, one thought about retail as “dumb money” since both this and the first item we discussed seem to support that idea. A lot of people brand new to investing and an even larger cohort whose cash balances show they’ve missed the rally since March 2020 don’t suggest a Mensa-level stock market IQ.
Fair enough, but let’s compare retail investor behaviors to corporate stock buybacks. CFOs, CEOs and corporate boards approve and execute buybacks when the business is generating excess cash. Valuation plays essentially no role in that decision. Buybacks are a function of excess cash generation, limited investment opportunities and (occasionally) balance sheet optimization.
Bottom line: just like retail investors, corporate managements buy stock when they have the money to do so. The first may be “dumb money” and the second may be “smart” by virtue of education and position but, in the end, they do the same thing. Money flows, smart or dumb, are always cyclical in nature.
#3: Finally, a brief review of the Investment Company Institute’s weekly mutual/exchange traded fund flows:
- Supporting the idea that retail investors are setting marginal US stock prices, US equity fund inflows were +$7.6 billion for the week ending July 14th. The S&P’s all time high was on the 12th.
- US equity fund flows have been wobbly of late, flipping between positive and negative every week for the last month and a half. Net inflows over the last 7 weeks are positive (+$8.7 bn), however.
- Fund investors put remarkably little fresh capital into fixed income funds last week, just $5.9 billion as compared to a prior 4-week average of $12.2 bn. Hard to say if that’s due to low interest rates, but they certainly can’t be helping.
We’ll close by reminding you that 2021 is unusual in that fund investors have been consistently buying US equity funds. That was not the case at any point in the 2010’s bull market, which is why many dubbed it “the most hated bull market in history”. The current rally may not be universally loved, but at least retail investors are along for the ride this time around.
Money market fund balances: https://fred.stlouisfed.org/series/RMFSL
ICI Fund Flows: https://www.ici.org/statistics