(Bloomberg) — If the source of any of the resilience in U.S. stocks this year has been retail investors fired up by zero-commission trading, markets are about to find out how sturdy that money is.The sell-off stands as the first major test for mom-and-pop investors who, emboldened by a brokerage price-war, have effectively doubled their trades in equities over the last several months. The surge in interest from a group notoriously known for chasing winners has helped fuel a rally in stocks from tech giants to small-caps.The shares they love, from Tesla Inc. to Plug Power Inc., are plunging now, with a Goldman Sachs Group Inc. basket of retail favorites falling the most in nine months.“A lot of that money does tend to be hot money,” said Alec Young, managing director of global markets research at FTSE Russell. “It’s very sensitive to near-term losses.”Global markets buckled Monday, pushing the S&P 500 down almost 5% from its record close five days ago, the bull market’s biggest interruption in six months. Concern about a possible pandemic drove investors out of risky assets and into bonds and gold.Goldman’s basket tracking the 50 most-popular stocks among individual investors fell 3.9%, the biggest retreat since last May. All but two declined as Tesla and Plug Power each sank more than 6%. It’s a decisive turnaround for retail investors, whose picks as tracked by Goldman had surged 13% in 2020 before this week. That’s almost four times as much as the S&P 500.Though impossible to prove, a case exists that individual investors streaming into the market have contributed to the relative buoyancy of equities at a time when fixed-income has sent much more dire signals. The stock market rally that fell apart Monday came against a backdrop of steadily falling yields in Treasury markets that are dominated by institutional traders.Others see a perfectly ordinary bull market occurring in stocks that requires no special influence or agency to drive it and are skeptical individuals have played an outsize role. If anything, it’s bonds, not stocks, that are being boosted by small investors.“A lot of what is happening with bonds has to do with demographics,” said Michael Antonelli, market strategist at Baird. “Baby Boomers are retiring, the world is starved for yields.” The equity market, on the other hand, “is really controlled by institutions. This up-and-down price action, that’s not retail money,” he said.The bull market, which turns 11 years old in two weeks, also predates the recent uptick in small-investor interest. At an all-time high last week, the S&P 500 traded at 19 times forecast earnings, the highest multiple since the dot-com era.Perhaps no other investor group than retail has a greater propensity to chase winners regardless of valuations and company fundamentals. Among retail’s darling stocks, 10 scored year-to-date gains exceeding 20%, including Plug Power, Tesla and Virgin Galactic. Yet only two made profits in 2019.While hardly the only ones to fall into love with megacap tech, their affection for Apple Inc., Amazon.com Inc., Facebook Inc. and Microsoft Corp. has likely contributed to a top-heavy market that some strategists have warned is becoming hard to sustain.It reminds Peter Cecchini of the retail over-involvement in the late 1990s that spelled the golden age of equities and foreshadowed the crash.“While retail involvement in and of itself is not always a sign of frothy markets, when that involvement generally appears to be based on a fear of missing out or otherwise uniformed decision-making, as now, then it is cautionary,” said Cecchini, chief global market strategist at Cantor Fitzgerald LP. “The coronavirus may help demonstrate how quickly it can all come unraveled when fundamentals disconnect from the narrative hype.”Retail money, indifferent participants for much of the 11-year bull market, just made an epic comeback, lured by brokerages slashing commission fees to zero and an equity rally that added $7.5 trillion in market values last year. Daily average trades at E*Trade Financial Corp. and TD Ameritrade Holding Corp. have almost doubled to all-time highs since last September, data compiled by Sundial Research showed.“History has shown that retail investors do respond to near-term volatility, so folks are rather fickle,” said Mike Skillman, chief executive officer of Cadence Capital Management. “If we see an increase in volatility in the next several weeks, flows into the market will slow down, if not reverse.”–With assistance from Claire Ballentine.To contact the reporters on this story: Lu Wang in New York at firstname.lastname@example.org;Vildana Hajric in New York at email@example.comTo contact the editors responsible for this story: Brad Olesen at firstname.lastname@example.org, Chris Nagi, Richard RichtmyerFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
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