Are Retail Investors Getting Back to Their ‘Normal Lives’?

Over the last few weeks I’ve been reading headlines and watching market moves that make me think retail investor participation has crested and is now on the decline (at least for the short term). Combine that with the ‘reopenings’ happening around the world, and I get the feeling that retail investors are going back to their ‘normal lives.’

With the onset of COVID we saw one of the largest booms in retail investing: estimates are around 15% of all retail investors began in 2020. It was a perfect confluence of events that drove the surge: being locked down with very little to do, a pause in professional sports, and in many cases, a stimulus check of capital. Throw in easy to use trading applications that are now free, and you have everything you need to drive a tsunami of new retail investors.

That’s exactly what we saw: in 2020, and through 2021, retail investors were a massive part of the market. Subreddits such as r/wallstreetbets exploded in popularity and became general knowledge for the first time, and stock trading apps like Robinhood gained ubiquitous usage.

Fast forward to the start of 2022, and that trend seems to be reversing. Robinhood has traded down more than 60% from its highs, which it largely attributes to a drop in trading activity (and a drop in market volatility). Reddit and wallstreetbets users have had enough, as the WSJ profiled: users are complaining that the subreddit has become tired and repetitive, with just a few users mumbling daily about AMC and GME. In fact, you can look at the stats on the subreddit yourself to see that comments and engagement peaked in early 2021 and has been on the decline since.

It makes sense though – with the world reopening, and everyone getting back to ‘normal life’ (whatever that means going forward), people are going to have less time to sit at home and trade their portfolio on a daily basis. It might mean that retail investors sell off their portfolios and push the capital to money managers (which may be why we saw a massive retail exodus last week), or it may simply mean that retail investors trade less.

Either way, the exit of retail investors, at least of the scale seen during the lockdowns, will mean a different market going forward. If I had to guess two of the major impacts, it would be: less liquidity (especially safe liquidity that is often referred to as ‘dumb money’ – no one worries about getting runover by a retail trade), and lower multiples for the public consumer companies that benefited from being well known and recognizable to retail investors. On the bright side, it likely means a re-focus on sound fundamentals, realistic multiples, and strong businesses, which will be good for some.

While retail investors may have been a bull in a china shop for the last two years, it looks like they are exiting the markets for now. That will mean a major change for one of the largest sources of trading volume, which will have plenty of knock-on effects.

I find myself wondering what else is going to change in the industry as we get back to ‘normal life’ – lockdowns get lifted, travel picks up, people start commuting to the office (although likely much less than before), and we get back to whatever the status quo is going forward. We just settled into remote life after a year or two of chaos, and it looks like just as things are settling down, they’re about to be thrown into disarray again. Never a dull day.

Some thoughts for a quiet Sunday.

Street Contxt

Hit The Street

Cut through the noise and avoid information overload.