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Jun 5, 2020

Dumb money is looking a lot smarter in never-ending stock rally

Larry Berman: Trying to make sense of market valuation of the V-shaped recovery

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The scores of individual investors who piled into what seemed like an endlessly falling stock market are winning big now.

The S&P 500 has soared more than 43 per cent since March 23, the start of a torrid rebound from the rout that sent stocks spiraling around the globe amid the coronavirus pandemic.

In the months since, a flood of fiscal and monetary support combined with economic reopening optimism has fueled gains in even the mostly badly battered corners of the market.

That’s been a boon for the growing ranks of day traders.

Retail brokerages including Charles Schwab Corp. and TD Ameritrade Holding Corp. posted record account sign-ups and trading volume in the first quarter as individuals tried to catch the bottom, prompting warnings from Wall Street professionals in the process.

However, with the S&P 500 just a hair away from turning positive for the year, the retail uprising’s timing looks downright prescient.

“Young investors have been putting money in the market, and in the short run, that seems to be good timing,” said Mike Skillman, chief executive officer of Cadence Capital Management.

“The evidence in history for folks that day-trade their own accounts on average is not very good, so we’ll see how that plays out over a full cycle, but in the short term, that looks like a pretty good decision.”

That’s been particularly true in the exchange-traded fund universe.

The US Global Jets exchange-traded fund has swelled to over US$1 billion in assets and soared nearly 58 per cent in the past months as “bored” millennials pile in. The United States Oil Fund LP -- another favorite among retail traders -- has returned over 34 per cent in that time frame.

To some extent, it’s a self-fulfilling phenomenon.

While the individual trades may not amount to much on the own, when combined with similar investment from day trades around the globe, that’s added additional fuel to a rally that’s taken many by surprise.

For now, the success is bedeviling predictions by Wall Street titans such as Stan Druckenmiller and David Tepper, who cautioned last month that the risk-reward of holding stocks was the worst they’ve encountered in years. But retail investors who sat tight through the volatility are reaping the benefits now, according to Kingsview Investment Management’s Paul Nolte.

“Retail money has learned their lesson, stay allocated, don’t worry about the market jumping all over the place, stick to the program,” said Nolte, portfolio manager at Kingsview. “They’ve gone to school and they’ve got their learning. They’re not quite Ph.D.-level, but they’re certainly well beyond high school.”