Hi there—here is this week's update!
TL;DR - Too Long Didn't Read
-It's official. The US entered a recession in February.
-The market rally is mainly driven by small non-professional investors (retail investors), not large institutional investors
-Retail investors have rushed into the stock market, buying shares of companies that have declared bankruptcy in a ludicrous "buy the dip" mentality
-Without large investors leading the charge, we believe that the markets will likely fall to, or go past the lows of March
The Robinhood Rally
Retail investor trading activity has broken several records during the pandemic. What we have been calling the "Robinhood Rally" appears to be driven decisively by retail investors. The institutional investors on Wall Street have largely denounced the rally, and have limited exposure to the stock market.
In this day and age, small retail investors salivate at any opportunity to get rich quick, and a bankruptcy filing announcement has become a "buy the dip" signal for many of them. What these very inexperienced investors don't understand is that a companies stock is typically worthless in bankruptcy.
While Wall Street icons denounced the rally, retail traders kept on buying. Six of the S&P 500's ten best-performing stocks over the last month appear on a list of companies that have seen the biggest pickup in interest among users of Robinhood.
Since Hertz filed for chapter 11 bankruptcy, its stock has skyrocketed more than 400%, largely fueled by retail investors. A similar trend has emerged for other distressed companies such as Whiting Petroleum Corp. and Chesapeake Energy, with the latter climbing 182% on Monday.
According to the website Robintrack, individual investors on the app have been flocking to bankruptcy-protected companies. Robintrack's data show 159,000 users now hold Hertz stock in some form, up from 37,000 users a month ago. More users on the investing app hold bankrupt Hertz than do Netflix Inc.
David Donabedian, CIO of CIBC Private Wealth Management, says that many hedge funds are playing a longer game and have generally been suspicious of that very strong and quick rally in the market.
For smaller traders, on the other hand, it's been "a mania, to go for the stuff that looks the diciest and bet on a high-beta rally."
The National Bureau of Economic Research officially stated that the US is in a recession. This is now a fact.
The mania and greed that we're seeing have only continued to widen the gap between what is going on in the economy and where the stock market is.
The last time we witnessed a retail buying frenzy, it didn't end well. The dot.com and crypto-currency bubbles were driven by FOMO and not value.
Not to mention, we also have higher unemployment than during the financial crisis, the deepest recession since the great depression, and a deadly virus that has shown no signs of dissipating.
It's expected that the next wave of unemployment will hit the middle class, which should not bode well for retail investors. Hail Mary stock picks will not save these investors with unemployment benefits running out, credit card bills needing to be paid, and rent being due.
Unless the smart money, the professional fund managers, somehow change their minds and decide that investing no longer has to be based on earnings and real data, the Robinhood Rally will most likely crash and burn.
At Round, we don't chase quick highs built on smoke and mirrors for our clients. Our job is to manage your investments, not gamble with your money. We don't see a good reward for the current risk in the markets at the moment. When markets fall, and the valuation of assets make more sense, we will go risk on.
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