Market Musings 070221: Retail Power a Flash in the Pan, or Structural Shift?

7th Feb '21 by Edmund Shing

13 comments 1966 reads

Retail Power a Flash in the Pan, or Structural Shift?

Summary:

Panic/Euphoria index points to heightened risk of market correction;
But little sign yet of a crescendo in equity fund flows, with investors still heavy in bonds, credit and cash;
Monthly EM, Europe stock market charts look bullish with recent moves to new multi-year highs;
Democratisation of stock market investing can be a good thing - but the use of call options is likely to end in tears for many
The Biotech sector in focus - a strong momentum play

This chart worries me...

Following up on my comments last week regarding the risk of stock market correction in the near-term, I present as my latest exhibit this chart from Citi:

The Citi Panic/Euphoria Index at a 30+ year high

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With the level of euphoria in financial markets apparently so very high, higher than prior to the last big bear markets of 2000-03 and 2007-09, why do I look for only a short-term correction and not something far worse?

These charts are a key reason for my (relative) optimism that the current bull market is not yet reaching a crescendo: put simply, retail investors have not been pouring huge amounts of new money into the stock markets, at least not until the last four weeks.

Note how back over 2003-07 there were constant strong inflows into US equity mutual funds and ETFs. Contrast that with the data over 2019 and last year, where investors were actually constantly withdrawing money from equity funds, even as the stock markets rose.

The massive investment inflows have gone to government bonds and corporate credit, rather than stocks…

Over the last 2 years, investors have piled into bonds and credit, not stocks

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Source: yardeni.com

On top of that, the combination of lockdowns and government handouts (in the form of stimulus checks in the US, and furlough cash in Europe) have led to a surge in the amount of cash held in household savings accounts, earning virtually no interest.

US bank cash savings have exploded over 2020

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Source:yardeni.com

While some of this excess cash savings is likely to be spent in the form of pent-up consumption once restrictions are gradually lifted, it is also likely that some…

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Zipmanpeter

7th Feb '21

Great charts and thought provoking as ever. Personally, I think there is a lot of short term froth and hype around Robin Hood etc but the reduction in trading costs is a long term trend and ultimately will get close to zero - the base service is basically a commodity product with near to zero marginal costs once set up. Competition will push this part down as people try to sell higher value, personalised services. Good news for private investors dealing in small quantities where spreads are still ridiculously wide in some cases.

MiserableJacktPotato

Yeah, agree, my bank have been forced to reduce their charges on trading commission by 25% from April. They’ve trebled the administration fee, but that nets out after 10 trades (which is only 5 buy/sell) and I suspect they’ll have to reduce again in future years.

woodcub

Love the fact you have a summary at the top of the article Edmund, I find this very helpful, and wish others would do the same, thanks!

pka

Excellent article as always, Edmund.

Simon Rowan

Hi Edmund. Plenty of food for thought here. Its always difficult trying to understand where the market is heading. firstly the FTSE100. Still well off the high of 99/00. Its full of dogs. Oil stocks have been a disaster, but the lower use and improving alternatives make recovery pretty difficult. Shell claimed last year oil use would not peak until 2035. I think that is wishful thinking on their part and suggests that they are not as far with their own move into 'green energy' as they would have us believe. Disaster for pensions and dollar. Although the hit must be largely built in. Of the traditionally invested trusts in BP and Shell, Merchants Trust seem to be one of the very few to take advantage of the bottoming out, although with the huge debts, losses and dividend cuts and over supply it doesn't appeal to me apart from a couple of speculative juniors. The most successful Uk trusts seem to be the ones that moved out of traditional finance and oil a year ago.

Ai described by one analyst as bigger than the discovery or harnessing of fire. Difficult to say how much affect AI is having on the stock market yet, as its not clear how many companies are embracing the new technology to their advantage. OCDO perhaps the most obvious beneficiary so far in UK, but also defence and aerospace technology.

The effect of phone apps I would think has had a positive new effect on markets. My sons and their mates all seem to make small but regular trades, mostly in US tech though. Will be interesting how this pans out when this newish generation of self investors work out that the uk also has some very good rewarding small caps too. One aspect I'm unclear of is how institutional and director dealing directly affects the stock market. I have seen some massive movements of stock (broker to broker) without affecting the market and other times relatively low volumes of small BOT trades and low value retail trades causing huge volatility. It doesn't seem like the open market or level playing field is as they pretend it to be.

Lastly the preparation for negative interest rates. You are right I have increased my range of holdings recently partly to reduce my fairly conservative 50/50 cash to stock holding ratio, but also because the value has increased substantially. So the cash element has reduced more dramatically because of the strength of the stocks as well as investing more. I don't think the fact that we may have to pay banks to keep our cash is quite as concerning as the psychological worry. The reduction of interest rates from 6% 15 years ago to .25% is a far bigger blow. The risk now is a .25% rise in rates is in fact a 50% rise like going from 5% to 10%. I suppose the BOE would have to be very careful when that happens to prevent crashing the housing and stock markets. Unlike Norman Lamont!

William K

Thanks Edmund. Lucid, succinct, balanced and intelligent. Always a pleasure to read your weekly observations. Strongly agree that ETFs are the way forward. Maybe for next week your thoughts on AI ETFs like IRBO and ARKQ.

The Ox 2906

Thanks Edmund very interesting. I know it’s a bit of a cliche but markets seldom crash when everyone is talking about a bubble and you’re certainly not alone in writing about it. Tesla and the FAANGS are certainly frothy the former probably benefitting from the Robinhood effect which pushed up GameStop and other sizeably shorted stocks, which has been more about bloodying hedge funds’ noses as opposed to market valuations being cheap or expensive.
There could definitely be value in London and other markets in comparison but of course when Wall St sneezes we catch pneumonia if you excuse that expression in these COVID times!

tjhigs

8th Feb '21

Dig a bit deeper into RH's business model and you'll probably find that commission free trading is just a sleight of hand. Orders are routed to just a few counterparties who will take a spread, and pay a kickback to RH. Google "payment for order flow". RH were fined $65m last year because they claimed their execution was as good as their competitors. I'm not so sure this is the future, particularly in the UK where we are quite strict on Best Execution (RH backed out of a launch here).

Yes, commission free trading must be a sleight of hand, otherwise how would Robin Hood be able to make a profit?

Edmund Shing

Hi Peter

completely agree! The time to worry about the end of the bull market and a bear market, is when no-one talks about the risk of a crash and inflows to equity funds are massive. On that basis, we are nowhere near this point...

Also worth pointing out that recessions (and bear markets) are normally caused by central banks (led by the US Fed) raising interest rates to slow down the economy... again, no chance of seeing that any time soon.

But yes, with the VIX volatility index still above 20, one cannot expect smooth sailing...

Best Edmund

shamusj

Great article thank you. I think the shift in retail trading participation is permanent, and I believe that IGG group's £1B acquisition of Tastytrade (announced in January 2021) was very shrewd. I was not previously invested in IGG but seeing how the price has dropped over the last month to what I see as an amazing value level I picked up a large chunk today.

aflash

Investment Association tells a different story about the short term:

2020 net retail sales hit £31 billion, with inflows in the second and fourth quarters of the year both exceeding £10 billion. This is a huge rise compared to 2019, when total net retail sales only just reached £10 billion.

Active funds accounted for £12.4 billion of net retail sales last year compared to an £8.1 billion outflow in 2019.

Equity funds were the bestsellers by asset class, taking £10.4 billion over the year. This marked a significant reversal of the previous year’s £2.9 billion net retail outflow.

9th Feb '21

Hi aflash,

Your comment is interesting - so look at this chart, from the IA data:

You can see that while UK equity fund net retail sales were indeed positive, they have in fact only been in line with sales of bond funds and mixed assert funds for most of 2020, only really outstripping these two in the latter part of last year.

You had the usual ISA bump in April, probably exacerbated by the fact that the stock market was bottoming out then, and then a surge in November-December, again on the back of a very strong November for stock markets.

From this data, I wouldn't say that UK investors have yet become over-exuberant in equities...

Edmund

Market Musings 070221: Retail Power a Flash in the Pan, or Structural Shift?

Retail Power a Flash in the Pan, or Structural Shift?

This chart worries me...

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Edmund Shing

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