July 6, 2020
- Deltec Bank’s Investment Research team recently published research exploring excess retail investor speculation within US equity markets
- Retail trading volumes have surged by over 300% in 2020, driven by low stock prices and zero-fee trading
- Deltec Bank warns that retail investors face potential ‘washout’, highlights stability and success of their investment portfolios, led by CIO Hugo Rogers
Deltec Bank & Trust Ltd, a Bahamas-based private bank recently awarded the title of ‘Best Private Bank in the Caribbean’ in 2020 (http://nnw.fm/Cd59O), has published its latest investment research note entitled “Robin Hood-Winked” (http://nnw.fm/6Y4yE), which delves into the recent surge in retail investing and the dangerous game many may be playing.
Sparked by the emergence of zero-commission online trading in late 2019 – a result of the ongoing price war between major retail brokers in the United States (http://nnw.fm/HM6uX) – and the rise in popularity of Robinhood, a retail trading platform which has brought concepts such as fractional share ownership to mainstream attention, retail investing in the United States is enjoying a renaissance of sorts.
The emergence of the viral outbreak in early 2020 coupled with a raft of global quarantines and ‘shelter at home’ directives led to a dramatic plunge in the S&P 500, with the equity index plummeting by 34% from its peak prior to bottoming out on March 23 2020; at one point, wiping out all of the market’s gains dating back to the 2016 presidential election. However, the dramatic fall in stock prices coupled with the newfound ease in accessing trading platforms also led to a surge in retail equity investment.
In the first quarter of 2020, the four major online brokers (Charles Schwab, E-Trade, Interactive Brokers & Robinhood) revealed that they had witnessed new accounts grow by as much as 170% relative to 2019 (http://nnw.fm/Ixds6). Robinhood, whose median customer age is only 31 years old, announced that they had single-handedly opened over 3 million new accounts during this period and saw three times its average customer trading volumes compared to 2019. Despite the dramatic increase, overall retail trading volumes remains small relative to institutional investor volume and won’t move markets on their own (http://nnw.fm/N1jBm). However, the significant biases of these investors, amplification of positive momentum and the interest in smaller cap low priced stocks are visible nonetheless.
Deltec Bank’s research team identified a number of disquieting trends resulting from the retail investment surge. Led by popular online personalities touting the axiom that ‘stocks [can] only go up’, retail investors have adopted an exceedingly positive bias, bordering on pure speculation. In the options market, the ratio of outstanding call options to put options, indicating bullish vs. bearish bets, rose to 2.8x (a level which has only been exceeded twice in the past 5 years) (http://nnw.fm/pCn6V). Worryingly, the extent of this speculation has reached the stocks of companies that have filed for bankruptcy. The rental car company Hertz was a key example illustrated by the bank – after filing for bankruptcy on May 23rd, Hertz’ share price fell to nearly $0.50/share. Nevertheless, retail investors flocked to the company, attracted to the low share price on offer, and the stock rose by over 574% in a single week. That fact that the shares were effectively worthless didn’t seem to matter, and Hertz almost got away with selling retail investors another $1 billion of worthless stock before the SEC stepped in.
While increased retail participation in the stock market is undoubtedly a positive market thematic, Deltec Bank’s report illustrates that the recent excesses demonstrated by retail investors – such as Dave Portnoy, founder of betting site Barstool Sports livestreaming himself picking out his next investment at random (http://nnw.fm/HvpD9) – suggest that the retail market are “due a washout”.
During times of heightened market volatility such as the present, Deltec Bank seeks to safeguard its clients’ wealth by positioning their investment portfolios in a well-structured and conservative manner, led by Deltec Bank CIO Hugo Rogers and team, who boast a strong and long-standing track record of delivering results on behalf of the bank’s investors.
