Mom-and-pop investors are outperforming Wall Street old-timers, but what is the real reason why? Somehow, stocks bought by the so-called “dumb money” investors generate 61% returns compared to stock picks of mutual fund and hedge fund managers, who are returning a lower rate of 45%.
A new breed of retail investors is on the rise, buoyed by the “things-are-looking-up”reports last May that foresaw a rebound in the market and an end in sight for the coronavirus-led lockdowns. In addition, the Federal Reserve has kept interest rates to zero and near-zero levels since March in order to help protect the economy from the effects of COVID-19.
According to Goldman Sachs, retail investors were able to pull off their victory because they were quicker to acquire high value stocks as the market rally started gaining ground. By May, these investors began shifting to cyclicals, small capital stocks, and economically sensitive stocks, who all warmed up to the positive outlook.
Apart from the lockdown and unemployment induced environment that led to an increase in retail investors, the stock feeding frenzy was seen as a reaction to the Fed Chairman Jerome Powell’s movements to keep the markets healthy by the time recession hits. The lowering of the Fed interest rates to 0 – 0.25 is an indication that money will be available at least until 2022.
Some of the stocks that benefited from the outpouring of investments from retail traders include Penn National Gaming, Royal Carribbean, Norwegian Cruise Lines, Apple, Facebook, Nvidia, Snap, GM, Ford, Tesla, MGM Resorts, and Groupon. They also include some questionable buys such as Hertz, which has previously filed for bankruptcy but has been allowed to issue stocks.
It has been noted that the surge of retail investors were an offshoot of factors: the popularity of minimum amount trades, the Robinhood no-commission trading app, and the general lack of activity among people recently unemployed and those forced to stay home during the lockdown.