Like Paul Tudor Jones and Stan Druckenmiller, institutional investors “have been stunned by the juxtaposition of the sharpest GDP contraction on record with a 36% market rally”, Goldman’s David Kostin says, in a note out Friday evening.
Jones said this week it was time for some “humble pie” and Druckenmiller told CNBC he “missed a great opportunity”, having logged just a 3% gain in a 40% rally.
While participation from hedge funds and other manifestations of the “smart money” may have been lacking in the surge from the March lows, retail investors took the opportunity to add exposure, first via mega-caps and then through manic day-trading in a hodgepodge of beaten-down sectors and even some bankrupt companies, helping to fuel the rotation into cyclical value and high beta, which took a pause this week after an enormous rally.
Goldman’s Kostin discusses this, summarizing what I’ve written across tens of thousands of words using just a single paragraph. To wit:
The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks. High quality growth stocks outperformed during the market drawdown and continued to lead in the first weeks of the rebound, narrowing market breadth and contrasting with past bear market recoveries. Between March 23 and the middle of May, our long/short Growth factor returned 9% and our Momentum factor rose by 2%. This dynamic benefited institutional investors, who had shifted toward growth stocks as the market declined. Since mid-May, however, our Momentum factor has declined by 19% as improving virus and activity data pushed investors toward cyclicals, small-caps, and other economically-sensitive, low-multiple stocks. Stocks with these qualities which were quickly embraced by value-seeking retail investors, and now make up a large portion of our retail basket.
This is part and parcel of the narrative which informed at least a half-dozen popular Bloomberg articles centered around retail investors who piled into names like Hertz and other bankrupt entities.
The strategy for those folks isn’t entirely clear, but one hopes the idea was simply to score quick gains. If not, we’re left to ponder the terrifying prospect that the Robinhood faithful doesn’t understand the word “insolvent” when it comes to corporations.
If that’s the case, they’ll get a crash course soon enough, because that word will describe their own financial situation if they persist in being “Overweight bankruptcies” in their asset allocation.
Read more: The Fed? Robinhood? World Demands Answers For Increasingly Silly Stock Rally
Anyway, Goldman goes on to present a highly amusing chart, which you may (or may not) have already seen.
For the latter part of the rally from the March lows, the bank’s “retail trading favorites” basket has run way out ahead.
(Goldman)
Notice the pullback after the peak in the light blue line.
Over the past few days, as US equities suffered their largest weekly decline since the height of the crisis, hedge fund VIP names outperformed the retail favorites for the first time in four weeks.
That outperformance (for hedge funds’ high conviction names) coincided with strength in momentum factors and weakness in cyclical value, as “rotation frustration” set in against jitters around the reopening story in the US and generalized economic angst.
Still, the Robinhood crowd got one over on the “smart money” for several glorious weeks, as airlines and other names crushed in the COVID panic attempted a rebound.
If you’re wondering which stocks comprise Goldman’s “retail trading favorites” basket, the full list can be found below. The figure shows the top performers from that list since the March lows.
“The narrative of Main Street weakness versus Wall Street asset inflation is misleading”, Goldman’s Kostin says, noting that the portfolio of stocks popular among retail investors is up 61% since the bear market trough compared to “just” 45% for hedge fund and mutual fund favorites. Both figures are higher than the S&P’s return over the same period.
“Given the unique set of circumstances, we do not see the retail dynamics changing”, JPMorgan’s Marko Kolanovic said Friday. “More savings, staying at home, substituting for sports betting and online gaming, etc.” should mean retail investors stay engaged, he suggested.
Still, some worry those in the retail community may be unjustifiably emboldened by their recent success in names like Hertz and Chesapeake, which are insolvent. “They’ve already filed for bankruptcy. That means, equity investors are not going to be left with anything”, one pro told Bloomberg. “It’s a nonsense trade”.
That’s true. But then again, Bitcoin is also a “nonsense trade”, and plenty of people made money there.
Ultimately, the broader market narrative hinges on policy support and the waxing and waning of the reopening story, something Goldman underscores.
“The combination of incremental data improvement and extraordinary policy support has been sufficient to assure the forward-looking market that the earnings damage resulting from the virus will ultimately be short-lived”, Kostin says.
People love pyramid schemes when they are early to the game….. Should make for a more interesting W recovery.
Probably why POTUS wants to mail out more checks, time it right and we can have S&P 4000 at election time…
He does know a little bit about gamblers.
Where do these stereotypical retail players get their trading ideas from? Oh yeah that is right they get it from the dog and pony show self proclaimed as legitimate, well known financial names grifting market insight. So the leaders of the rally took a little hit last week and they will get another toe stubbing with some of their selections here shortly. Will they not still be ahead of the financial geniuses who may not have even broken even from the March losses?
They may be ahead for some time to come. Also are we assuming that these would be (out of envy/) scoundrels do not have active accounts, indexed funds, other traditional investments. Retail investors are targets of the market crooks. I guess some of these recent conquerors of the crooked are just lucky, and do not have years of acknowledging and countering the endemic manipulative portfolio of schemes crooked financial souls bring to bare.
Someone who is out performing the markets by 40-60 percent can weather a whole hell of a lot compared to the meager who gained very little if at all over the last months.
Please tone down the “crooks”, “schemes”, etc. language. This post has nothing to do with malfeasance of any kind, and that kind of rhetoric detracts from the tone I want to foster on this site. Sarcasm, wit, etc. are obviously welcome, as is any discussion about the extent to which inequality in the country has been perpetuated by the prevailing state of affairs which puts the “little guy” (so to speak) at a disadvantage. But nebulous allegations of bad faith made against unnamed “scoundrels”, etc. isn’t constructive, and over the long-haul, has the effect of discouraging serious discussion and waters down the overall quality of the site.
Thank you. Will do.
You might as well beat them when you can, because you can’t eat them.
2020.
lol.
the animal spirits are alive in USA 🦖
I’ve been cross-referencing Robintrack vs performance of cyclical small cap names. Looks to me like the stocks favored by the Robinhooders held up better last week. They all went down, but the Robinhood-favored names bounced harder on Friday.