The S&P 500’s surge to a record is coming at a torrid pace, generating an almost unprecedented level of momentum for a market in this stage of a rally. It’s more affirmation for individual investors who have been flocking to equities all year.
Surging past its February high of 3,386.15, the equity benchmark has jumped more than 12% above its average price in the past 100 days — velocity it has exceeded only twice before at similar breakouts in data going back to 1927. The final push came as retail traders rose up to become the biggest presence in stocks behind market makers, a show of force that has helped lift the S&P 500 more than 50% in five months.
While a debate exists over how much small-time traders are driving the rally, right now, it’s impossible to argue with their results. Stocks popular with individual investors have risen almost seven times as much as the S&P 500 this year, with many doubling from their March low.
“Everyone remembers ’99 and day traders and people quitting the jobs to go trade stocks,” said Ryan Detrick, senior market strategist for LPL Financial. “You could argue that created the final push then. This time markets are bigger and there are more participants than there were then. Retail is definitely playing a part right now, there is just so much optimism, so much excitement.”
Five of their favorites, as tracked by Goldman Sachs Group Inc. as of June, have more than doubled this year, including Tesla Inc., Moderna Inc., Nvidia Corp., Plug Power Inc. and Penn National Gaming Inc. Altogether, the basket has surged 34% this year, compared with a 5% gain in the S&P 500.
Resisting the advance has proven futile — so far. Stocks’ unrelenting churn higher has begun drawing in all manner of professional investors, forcing them out of cash after cutting exposure to stocks to historically low levels. Retail traders are doing the same. After opening record accounts at many discount brokerages earlier in the year, now they’re sending more and more of their money into the market.
At E*Trade Financial Corp., clients have drawn down their cash, driving it to pre-pandemic lows. Charles Schwab Corp. and TD Ameritrade Holding Corp. have seen the pool of their clients’ unspent money shrinking, giving up half the increase during the market meltdown, data compiled by Vanda Research show.
Lured by free commissions, retail’s participation has boomed. Currently, individual investors account for roughly 20% of U.S. equity trading, according to an analysis by Bloomberg Intelligence’s Larry Tabb. While that’s about half the share represented by market makers and independent high-frequency traders, it’s way ahead of hedge funds and long-only institutional investors.
To be sure, the stampede of retail money into unprofitable companies, such as Eastman Kodak Co. and Hertz Global Holdings Inc., has sparked concern that their momentum chasing is overrunning fundamentals. After restoring almost $13 trillion in value and making a full recovery from 2020’s bear market, the S&P 500 now sits 12% above its 100-day average. Only twice in the previous 12 market cycles has the gap been greater at this point, in 1991 and 1982.
At 26 times forecast earnings, the S&P 500 was trading at the highest multiple in two decades.
As dangerous as it all sounds, Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, says he wished his fund had more cash to buy stocks. The near-record low yield from fixed income is one reason why some mom-and-pop investors have flocked to equities, and more of them are likely to follow, pushing share prices higher, he said.
Total assets in money market funds rose to a record in May, approaching $5 trillion, and have since fallen to $4.5 trillion, according to data compiled by Investment Company Institute.