The stock market may seem infallible to newer investors, but that could change if we ever get the global recession economists have been predicting.Brendan McDermid/Reuters
Plague, war and spectacular returns. That’s the decade so far in financial markets.
Five-plus years of wild volatility have done little to keep stocks from their relentless rise.
To recap, the 2020s have had a pandemic that killed millions, the worst inflation crisis in 40 years, the Russian invasion of Ukraine and a global trade war. Yet the S&P 500 index has risen by 94 per cent over that time, or 13 per cent annually.
This isn’t just American exceptionalism at work. Canadian stocks have returned 9 per cent a year over that same time.
Both markets closed at record highs on Thursday with no apparent concern for the latest round of tariff madness coming out of the White House.
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What’s curious about this bull market is how much the retail masses are piling on, no matter how much they are pelted with negative headlines.
A common perception is that financial markets are controlled by hedge funds and high-frequency traders. But individual investors have emerged as a driving force this year.
The numbers tell the story.
- Individual investors traded a record US$6.6-trillion worth of U.S. stocks in the first half of the year, according to Nasdaq figures.
- The largest recorded net inflow of retail money poured into U.S. single stocks and exchange-traded funds over the same time – US$155.3-billion worth, according to Vanda Research, which began tracking the data in 2014.
- In both Canada and the U.S., households have record levels of financial assets tied up in equities – 48 per cent and 43 per cent, respectively.
“Nothing seems to stop this retail train,” Marco Iachini, Vanda’s senior vice-president of research, said in a note to investors. “Participation is at record highs, the dip-buying bias is fully intact, and engagement with single names … continues to rise.”
One of Warren Buffett’s many overused quotes is to be “greedy when others are fearful.” This has traditionally been difficult advice for the everyday investor to stick to. Investment flows have generally showed the retail set selling into market downturns.
Now, it seems like everybody is Warren Buffett. Investors reflexively pounce on weakness, confident in the market’s swift recovery.
When the “Liberation Day” tariffs threatened to break the global economy in April, retail investors hurled their money at the stock market by the fistful. That day had the largest single-day retail inflow on record, according to JPMorgan Chase.
“The market is becoming numb, or accustomed, to this level of policy uncertainty,” Craig Basinger, chief market strategist at Purpose Investments, said in a note. “Market reactions to even bad news on tariffs have become muted.”
There is plenty out there that would normally scare the bejeezus out of the average investor.
We are in an era of maximal chaos, empirically. April was one of the most volatile months in stock market history, when the S&P 500 fell by 12 per cent, then promptly rebounded by 12 per cent.
The 2020s have had at least 440 days of daily moves larger than 1 per cent, either up or down. That’s on track to break the record set in the 2000s, which featured both the dot-com bust and the global financial crisis.
What sets this decade apart is that stocks just keep rising.
It’s not hard to see why investors have been conditioned to be contrarians. The market crash at the beginning of the COVID-19 pandemic lasted all of two weeks. Anyone who bought at the bottom would have doubled their money in less than 18 months.
To lots of newer investors, the stock market must seem infallible. That will change eventually, especially if we ever get that global recession economists have been predicting for three years now.
Investors must not lose sight of how much they have at stake in the markets. Risk hasn’t vanished, even if it may seem so.