For Retail Stock Traders, This Is a Party They Can’t See Ending

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Mom-and-pop stock traders, reaping the rewards of a faith that has proved prescient all year, are doubling down on a rally that has pushed valuations into uncharted land.

Their voracious appetite for equities, unchecked by the pandemic or presidential transition, has sent markets to records and iswhipping up volume in the normally sleepy Thanksgiving week. More than 26 billion shares changed hands on American exchanges over the last two days, up 72% from the same stretch a year ago. Demand is swamping brokerage websites, with both Vanguard and Merrill Lynch confirming their platforms experienced outages today.

Infrastructure is being strained as an ocean of money flows into American equities. As of last week, some $53 billion had been sent to U.S. exchange-traded funds in November, perfectly timed for the Dow Jones Industrial Average’sfirst foray above 30,000. Also ballooning are valuations. Buying the S&P 500 right now entails paying about $2.69 for every dollar of annual revenue, on a per-share basis. That’s way above any price-to-sales ratio reached in the dot-com bubble.

“There’s nothing this year that’s told them this wasn’t the right thing to do. Every time there was a dip, retail would flow in, and they were rewarded,” said Jerry Braakman, chief investment officer of First American Trust, in Santa Ana, California, which manages around $2 billion. “People are path-dependent, and if it’s been working, why change?”

All the excitement has caught the attention of Ayden McCloskey, a 23-year-old from Minnesota.

“I’ve been trading more. A lot of my moves are vaccine-related,” said McCloskey, a construction worker and DoorDash delivery driver. “When the market opens, I have to be thinking, what are investors thinking right now? A lot of people were thinking lockdowns soon. But when the vaccine news came, it was a new catalyst to latch onto.”

One thing retail has been right about: there was a fortune to be made buying beaten-down shares. November’s returns include an 84% rise in Occidental Petroleum Corp., a 51% jump in Boeing Co., a 48% increase in Carnival Corp. and a 45% increase in SL Green Realty Corp. Since the March bottom, Gap Inc., Etsy Inc., Freeport-McMoRan Inc. and L Brands Inc. have quadrupled.

A basket of stocks favored by retail traders has soared 75% this year going by Goldman Sachs data. That’s bested the S&P 500 by more than 60 percentage points and is double the return on hedge-fund favorites.

“Their persistence this year around buying the dip has paid off, and in some ways they probably feel emboldened to take on even more leverage and risk,” said Sameer Samana, Wells Fargo Investment’s senior global market strategist. “It’s mainly the vaccine news, coupled with still-constructive economic data and a Federal Reserve that is very vigilant, all of which feed into this sense that an investor can’t go wrong buying the dip.”

At E*Trade Financial, clients have been scooping up shares of travel companies over the past week, with the platform seeing net buying in stocks like Boeing and United Airlines Holdings Inc.

“While the travel industry has been pretty beaten up since Covid, there may be some relief in the near term and traders could be hunting for bargains given current valuations,” said Chris Larkin, managing director of trading and investing product at the brokerage.

There’s also been interest in vaccine-maker Pfizer Inc. as well as big-box retailers Walmart Inc. and Inc. ahead of Black Friday, he said, though clients have been offloading shares of big-tech pandemic plays like Apple Inc. and Netflix Inc.

While the rapidity of gains is sure to remind some of the dot-com days, a few big differences exist. Unlike in 1999 and early 2000, gains in the stock market are broadening today, with value and cyclical shares catching up with the tech megacaps that led earlier this year and in the bubble era. Back then, the Fed was raising interest rates. Today, it has them pinned near zero with little prospect of that changing.

“Sentiment toward stocks is hardly restrained, but our measures suggest it is less frothy than at the early-September peaks in the Nasdaq and the Russell 1000 Growth Index,” wrote Leuthold Group’s Doug Ramsey in a note Tuesday. “That makes sense, because the most extreme signs of retail speculation had been concentrated in these ‘can’t miss’ market segments, which have suddenly become the laggards.”

— With assistance by Lu Wang

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