(Yahoo) Unemployment may be at 13.3% — and maybe even up to 5 percentage points higher — but retail investors, the regular folks of the investing world, are jumping into the market, channelling their inner Warren Buffett to be greedy when others are fearful.
Many narratives have emerged both on Wall Street and in the financial media that these new investors, using zero-cost brokerages like Robinhood to trade stocks, could be joining the Federal Reserve and the government’s coronavirus response in pushing the stock market up.
But in a research note circulated to clients Friday, Barclays said no, “Robinhood is not behind the rally.” Using the popular Robintrack database that offers insight on most popular positions and changes, analysts from Barclays Investment Sciences wrote that since March 2020, when the market bottomed out, stocks have generally done worse when Robinhood users get interested.
“We have seen the opposite of the conventional wisdom—all else equal, more Robinhood customers moving into a stock has corresponded to lower returns, rather than higher,” the analysts wrote.
Though the Robinhood user holdings of S&P 500 ETF jumped in-line with the market’s gains, spikes in holdings of those ETFs didn’t correspond with spikes in the market.
If there isn’t a relationship between Robinhood activity and the overall market, what about individual stocks?
“It is undeniable that there are many examples of big stock gains coming along with big increases in Robinhood customer holdings. For example, Amazon has been a strong performer, gaining 45% since mid-March 2020 vs roughly flat for the S&P 500,” the Barclays note said. “But just because two things happen at the same time doesn’t mean one causes the other.”
Furthermore, they wrote, low-performing stocks have also seen big bumps.
“COTY has been the worst performing name in the S&P 500 since mid-March 2020. But the number of Robinhood accounts that hold COTY has increased sixfold, a much bigger gain than that for Amazon,” the note said.
Still, many disagree
Influential investor and billionaire Jeffrey Gundlach, speaking in an online presentation this week, said there was "something unnerving that's going on in this rally," and it "seems to be driven by a lot of rampant speculation."
Yes, Gundlach was talking about Robinhood. The “bond king” brought up a chart from Robintrack data and pointed to the rise of accounts and activity to the coronavirus lockdown, with a particular acceleration when the stimulus checks hit.
To Gundlach, this is an explanation, or at least part of one, to what’s driving the market, especially in the big tech stocks, because money just isn't flowing from institutional investors.
Other market watchers, like analysts at Goldman Sachs, have highlighted surges in new accounts, noting the "continued surge in retail investor trading activity has helped boost the growth stocks most popular with hedge funds."
Deutsche Bank’s Parag Thatte, who also looked at Robintrack data, mused that there seems to be a lot of evidence that retail investors are getting in on this rally and, like, Gundlach, saw flows markedly different for retail investors than other groups. In particular, Thistle noted that Robinhood accounts holding mega cap stocks (at least $200 billion market cap) rose by 50% during the lockdown.
Robinhood is not Vanguard
The focus on Robinhood activity makes some sense given the company’s role as a disruptor. It established free trades — making others do the same — and is pretty, modern, and millennial- and mobile-friendly. But does it deserve the constant callouts in analyst notes? Story continues at Yahoo Finance.
