Retail Investors Fuel Stock Market Rally Despite Recession Odds
Retail investors are powering a rally in the stock market, with average daily net purchases sitting around $1.5 billion in the first six weeks of 2023. Despite economic and geopolitical headwinds, investors are still buying the dip in stocks, with the S&P 500 rising nearly 5% year-to-date and the Nasdaq 100 more than 11% higher.
However, Vanda Research expects these flows to decelerate ahead of tax season. In April, investors tend to hold back their investments to build cash to pay their tax liabilities, resulting in a decline in buying across ETFs and single stocks.
This is in sharp contrast to the New York Fed's Recession Probabilities Model, which puts the odds of a recession at 57%, the highest it's been since the early 1980s. JPMorgan has noted that retail investors are “taunting the Fed” by investing in crypto, meme stocks, and unprofitable companies that are responding best to Fed communications.
Vanda anticipates that retail investments in stocks will increase as the second quarter draws to a close, as per usual seasonal trends. Investors should be aware of the seasonality of the markets and adjust their strategies accordingly.
0. “The retail trading frenzy that sparked a FOMO trade this year may be about to slow, and that's bad news for the stock market” Yahoo Canada Finance, 23 Feb. 2023, https://ca.finance.yahoo.com/news/retail-trading-frenzy-sparked-fomo-192804989.html
1. “Reddit's army of retail investors is partying like it's 2021” Business Insider, 23 Feb. 2023, https://www.businessinsider.com/reddit-retail-investors-investing-markets-wall-street-meme-stocks-fed-2023-2
2. “The stock market is about to drop as the retail FOMO trade fades away” Markets Insider, 23 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-retail-day-traders-fomo-trade-outlook-tax-season-2023-2
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