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The Wild West

17 June 2020

A new era of lockdown restrictions may have given rise to a new generation of investors. Mark Hawtin discusses the potential ramifications this up-and-coming cohort could have on the investment landscape.

Since the beginning of the year, it has been a tumultuous period for stock markets. Even before Covid-19, markets were pushing higher, with growth and technology leading the way. Then Covid struck, and we witnessed the fastest collapse in market history followed by the most rapid recovery. Most of the focus for this latest move has been explained by the extraordinary efforts of central banks, who have led the charge to provide liquidity at an unprecedented rate. While this explains the overall recovery of the markets, it does not explain the severe rotations that have been occurring. Goldman Sachs maintains a series of baskets that follow key factors, and the chart of its 12-month momentum losers is below; it is essentially the basket of the worst momentum names over the previous 12 months.

Chart 1: Goldman Sachs key factor baskets 

 
Source: Goldman Sachs, GAM

From the lows of the sell-off, this basket rallied 140% to the peak of three days ago (at the time of writing) and +80% from the mid-May dip. These are the names that most fundamental investors are unlikely to own, and long / short investors are likely to have present on their short books. To a lesser degree, other baskets have shown similar movements like value, and the ‘healthcare risk’ basket owns names which would benefit from a Covid-19 recovery (even though it was set up only three months ago as a basket to reflect the risks of Covid).

In trying to analyse these extraordinary moves, we have been drawn to the extraordinary resurgence of the retail investor. Lockdown has left many bored and looking for things to do at home, and what better way to get a dopamine fix than to trade the markets? 

Chart 2 and 3: Robinhood

Source: Company data, Robintrack, Goldman Sachs Global Investment Research

There has been a huge surge in account openings and trading levels, as seen in these two charts. From a reasonably steady two million average daily trades over the previous four years, daily trades have leapt by over 3x to as much as seven million. The big online platforms in the US have seen significant jumps in new account openings. Fidelity has reported 1.2 million new account openings in the March-May 2020 period, +77% year-on-year. TD Ameritrade reports +249% growth in new accounts in the first quarter.

But it is the Robinhood platform data that is perhaps most illuminating. At the end of 2019, Robinhood had 10 million active accounts, and it has seen a 30% increase in new account openings in Q1 2020, year-on-year. The median age of its user is 31 years old, and this is a key metric – a new strata of society that has traditionally shunned the stock market is showing up, and they have a very different way of investing / trading. They are led by the amplification that social media brings. No longer are we reliant on the ‘suit’ discussing valuation on CNBC; it is instead who shouts loudest and has the biggest following. Leading the vocal charge is the founder of Barstool Sports, who now runs a day trading Twitter account that has over 1.5 million followers: Davey the Day Trader, also known as Dave Portnoy. There are no valuation metrics in his message.

These new vocalisers of the market focus on being the antithesis of the traditional investor. In their minds, if Warren Buffett has sold his airline stocks, then it must be time to buy them. This cohort of investors has moved from buying stay at home winners in the down-leg of the market to the unloved recovery opportunities, like the struggling airlines or the downright bankrupt groups such as Hertz and Chesapeake Energy. It appears that joblessness, trade frictions, social unrest, Covid risk and the pending US elections do not warrant any attention, and certainly no discount. As Hertz declared bankruptcy towards the end of May and Carl Icahn dumped his stake in the company at 72 cents a share, the day trading herd was eagerly acquiring shares that subsequently hit over USD 6 in days before settling back at USD 3. The social megaphone was so loud that earlier this week, traders jumped on the Chinese name Fangdd under the misapprehension that it was some type of leveraged FANG name, only to discover it was in fact a Chinese property company. The shares rallied from USD 10 to USD 40 in a day before retreating sharply.  

We remember the frenzy that was the dot com bubble in 2000. This is beginning to have many of those hallmarks – although there are a significant number of good quality growth names that are not expensive, so the fundamental environment is clearly different. In addition, the sheer wall of money is a strong argument for continued buying of equities. Whether founded on fundamentals or not (maybe fundamental investing is old hat?), is this the new era of social investing, more akin to Vegas than traditional markets? As a reminder, equities are only secondhand pieces of paper, and they can trade for whatever price anyone is prepared to pay. There are plenty of younger investors today who clearly value the concept or the theme, like Tesla representing the epitome of the move to electric and transportation as a service. As the Tesla share price hit USD 1000 this week and the market value, at USD 180 billion, approaches that of Toyota, the biggest car company in the world, let us make sure we ignore that Tesla made just 367,000 cars in 2019 compared to Toyota’s 10.7 million.

Over time, and as the wall of money recedes, we do believe fundamentals will re-exert. For fundamental-based strategies, though, we need to be mindful of this huge new force at work. On just one day this week, Apple traded 1.2 million options, but open interest at the end of the day was just 135,000. That implies an intra-day activity of USD 35 billion in just one name. This is a factor risk that is new and should be taken into account in portfolio construction while these forces remain strong.

In the meantime, I will wait for my own Robinhood account to open. While trying to obtain data for this article, I found I had to sign up for an account. This is the screen shot from Robinhood, the UK site. At the time of writing, I am number 225,247 in line to be on boarded – and this is the UK waiting list only. If that does not say bubble, then I am not sure what does. 

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.