Monday, August 10
It’s easy to remember how euphoric investors were back in 2021 and 2022. Unfortunately, we’re reaching those levels again today.
Stocks were all anyone could talk about as COVID kept people at home and investing their stimulus checks in the market. Whatever hot stock was blowing up message boards got bids. Commission-free trading was more accessible than ever.
In 2021, non-professional or retail investors accounted for about 20% of all U.S. stock trading volume, which was a big change from institutional dominance. That percentage remained elevated in 2022 at nearly 21% of trading volume.
Of course, most retail investors chase whatever is hot. At the time, it was software stocks and companies benefiting from the work from home boom like Zoom and Peloton.
Then the market crashed and retail investors got burned. By the fall of 2022, the Nasdaq Composite fell 36%. Many individual stocks like Zoom went down 80%.
As a result, retail trading activity fell to about 18% by the time the bear market was over.
Today, retail investors account for over 20% of trading volume, just like in 2022. They’re pouring money into the hottest parts of the market, like richly valued tech and AI stocks.
As of this writing, the S&P 500 tech sector trades for about 11 times sales. The entire S&P 500’s average valuation is less than four times sales.
Investors are doing what got them burned less than five years earlier.
Daniel A. White is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Daniel A. White & Associates and CoreCap Advisors are separate and unaffiliated entities.