Meme Stock 2.0: Wall Street’s retail boom is back

Retail investors are pouring record amounts into US stocks, potentially giving small traders even more leverage over the markets than they did at the height of the “meme stock” mania two years ago.

Then an army of bored amateur traders, trapped at home during the pandemic, drove up the stock prices of several small, struggling consumer companies such as video game retailer GameStop, cinema operator AMC Entertainment and home goods chain Bed Bath & Beyond.

Now their bets are more widespread, suggesting fresh appetites after many have suffered losses over the last year. Liquidity flows from retail clients have helped propel a strong market recovery in early 2023 despite relatively low enthusiasm among professional fund managers.

Smaller investors invested an unprecedented $1.51 billion every day last month, according to data from consulting firm Vanda Research, while data from JPMorgan showed that retail investors accounted for up to a quarter of all stock trading in January, a record.

“With recent surveys showing that the institutional investor community is broadly declining versus equities, it would be unwise to underestimate the importance of the retail investor cohort,” analysts at Vanda said. “The bottom line is that investors should heed the signals from the ‘money ignorant’ crowd.”

Vanda’s data shows unprecedented interest from small traders in Tesla — a volatile stock that’s long been popular with retail investors — but also strong buying from dividend-paying giants like AT&T and Coca-Cola. Crucially, these purchases were primarily stocks rather than related options that can be used as a cheaper means of betting on a stock’s direction.

“The fact that they are not options tells us that there has been a shift in their long-term investments. I think that’s because we’ve lost money over the last year and a half,” said Vanda Senior Strategist Marco Iachini.

According to JPMorgan, inflows from the younger generation of traders associated with meme-stock mania have been boosted this year by interest from older investors. The latter prefer funds to individual stocks and as of Feb. 8 had invested $125 billion in exchange-traded funds and bond funds after selling $340 billion last year.

The bank’s data shows younger investors are buying back into small stocks, but are also snapping up the biggest tech stocks. Tesla is up 62 percent this year, while the tech-heavy Nasdaq Composite is up 12 percent. Small-cap Russell 2000 is also up 10 percent.

It has been two years since senior US trade executives, regulators and analysts were summoned to Washington to explain why the spike in retail investor activity linked to meme stocks had rocked the broader US stock market.

This triggered calls for far-reaching reforms. This week, the US Securities and Exchange Commission approved a schedule to halve trade settlement times to a single day to reduce risks, which prompted some retail brokers to cap buy orders at the height of the mania.

At the time, many analysts said Covid-19 created the perfect conditions for a retail boom, with low borrowing costs and a wave of new apps making commerce easier.

But the rapid rise in borrowing costs over the past year doesn’t seem to have dampened enthusiasm. Vanada analysts pointed to the high level of private investment in money market funds, which could still be deployed if market conditions are sufficiently enticing.

Some of the recent activity is likely seasonal, with earnings updates providing a catalyst for buying, while the upcoming US tax season could prompt some investors to withdraw cash to pay their bills.

“New account activity always picks up early in the year – I suppose people say ‘I’m going to be more careful with my finances’ as a New Year’s resolution,” said Thomas Peterffy, founder of Interactive Brokers, which focuses on more sophisticated investors. The total number of customer accounts has increased by 23 percent in one year.

“To me, retail investors are a bunch of 60-year-olds who have money and want to get into the market every now and then,” he added. “Twenties don’t have much money.”

Others disagree, arguing that a long-term shift is also underway as more investors become familiar with apps like Robinhood that make trading even easier.

Some industry participants are suggesting that meme stock generation has tailed off, using apps that were first launched for more traditional investing purposes during the pandemic boom.

People assume most young investors are part of the meme stock crowd, said Zoe Barry, founder of Zingeroo, a retail app with hints of fantasy sports-style rankings. “They don’t know that there are a lot of young traders doing the research and trying to learn.”