Closing the Generation Gap in Stocks May Be Market’s Next Act


While frenetic buying by retail investors gets all the press for driving the recovery in stocks, the beachhead established by newly minted Robinhood day traders was always a tenuous one. Now Wall Street is getting excited about a potentially bigger and more powerful force that is led by older Americans with more money.

It’s a case stock bulls are increasingly drawn to after a stellar second quarter fizzled out in a disappointing June. Equity strategists are eying the intentions of a more affluent middle-aged set that remained mostly unmoved by the frenzy that broke out in chatrooms and elsewhere in April and May, scene of the fastest S&P 500 rally in nine decades.

For all the bullishness among the Robinhood crowd, there’s still among older generations a healthy dose of pessimism, a sentiment that appeals to contrarians. Evidence of their skepticism surfaced as money flowed out of equity funds last quarter, vehicles that JPMorgan Chase & Co. says are preferred by older hands. Cash at retail brokerages like Charles Schwab Corp. remain near a record high and the latest survey from the American Association of Individual Investors showed bears outnumbered bulls by a ratio of 2-to-1.

Closing the Generation Gap in Stocks May Be Market’s Next Act

“The older generations of U.S. retail investors has been so far more cautious on equities than the new generation,” JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note. “The equity buying by retail investors will likely strengthen as the older cohorts, which have so far preferred to extract any remaining value in credit via buying corporate bond funds, will switch later in the year into equity funds.”

As everyone knows by now, small-time day traders, armed with stimulus money and possibly in search of distraction with casinos and sports leagues closed, rose up as a formidable force in the rally that began in March and lifted the S&P 500 by 44%. Their presence on the free investing app Robinhood dominated headlines, as favored industries like airlines and hotels roared back in the rebound.

According to data compiled by Vanda Research on account openings, to date most of the new money has gone into Robinhood. The platform opened 3 million new accounts from January to early May, more than double the combined openings of Schwab, Interactive Brokers Group Inc. and E*TRADE Financial Corp.

One thing researchers have noticed is the demographics of those buyers, which varies depending on their point of entry. The average age of Robinhood investors is around 30, at least 15 years younger than the typical user at TD Ameritrade and Charles Schwab.

JPMorgan analysts say there’s reason to believe older users will soon be forced to loosen their own purse strings when it comes to stocks, particularly if the recovery lasts and investors have to embrace more risk taking.

Closing the Generation Gap in Stocks May Be Market’s Next Act

At Schwab, clients generally still favor bonds over stocks, according to Liz Ann Sonders, the firm’s chief investment strategist. At the same time, she says, new accounts are skewing toward a younger demographic, a trend that bodes well for the market.

“In the last cycle, there was an assumption that we’re never going to get younger folks interested in investing,” Sonders said in an interview on Bloomberg Television. “If we step back and try to find the glass half full here, it is hopeful that we’re attracting younger people to the whole notion of investing.”

The direction of retail money has never mattered more than now, in a market where corporate repurchases are dwindling and Goldman Sachs anticipates household demand to step into the void left from a dearth of buybacks. While the frenzy among Robinhood traders has sparked some comparison between today and the dot-com bubble, the broader orientation of retail participation is much less exuberant.

Take fund flows. Investors have pulled $7 billion out of mutual and exchange-traded funds that focus on equities since the market’s bottom in March, according to data from Investment Company Institute. That brought the total withdrawals for 2020 to $84 billion.

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, notes persistent skepticism among the firm’s rich clients, who are mostly older and may be more sensitive to the Covid-19 health risk. Another source of concern for this cohort, he says, is the uncertainty over the presidential election, but this too shall pass once the economy finds its footing, he said.

“We don’t think retail money has been driving the rally but see potential for this as the recovery path becomes clearer,” Wilson wrote in a note. “While it’s unlikely either of these issues will be completely resolved in the near term, we think they will and simply add to the wall of worry that may lead to positive inflows later this year.”

Closing the Generation Gap in Stocks May Be Market’s Next Act

And the older generation has abundant money to put to use. Client cash at brokerage firms has stayed elevated despite a second-quarter rally that’s the best since 1998. At Schwab, cash accounted for 14% of client assets in May, a level that before March would have surpassed any time since at least 2014.

“Boomers and Gen X investors have plenty of dry powder to buy stocks in the next three to six months,” said Ben Onatibia, a strategist at Vanda. “Keep tracking millennials but don’t forget boomers.”

©2020 Bloomberg L.P.

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