The Main Street Faces of the Fierce Rebound in Stocks

(Bloomberg) -- Back on March 23, it seemed like stocks would never stop falling. Congress was struggling to pass stimulus, coronavirus cases were climbing, futures were pinned to their bottommost tick and $10 trillion in value had vanished.

Meanwhile in Northern Virginia, Nicole Kelleher was opening her very first brokerage account. Little did she know, the S&P 500 was about to surge 30%.

The romance novel writer and administrative aide at George Mason University spread $5,000 across Peloton Interactive Inc., Fitbit Inc., Trivago and Dropbox Inc., among others, on the Robinhood Financial app. Her husband, a restaurant executive, told her she needed some real estate. So Kelleher bought shares of MFA Financial Inc. Five weeks later, the portfolio is up almost 12%.

On their own, Kelleher’s purchases don’t amount to much. But combined with similar decisions by tiny investors around the country, the buying represents a formidable force that has helped the market claw back more than half the ground lost in its fastest bear-market drop. A trio of giant retail brokerages, E*Trade Financial Corp., TD Ameritrade Holding Corp., and Charles Schwab Corp., each saw record sign-ups in the three months ending in March, with much of it coming at the depths of the swoon.

“I’m a complete noob when it comes to stocks,” the mother of high school senior twin boys said while sheltering at home. “It’s not thousands and thousands of dollars that I invested, but it’s a start. We’ll see what happens. I hate to say it, but it’s like gambling, isn’t it?”

There may be something to that. “When the casinos/sport betting closed down, some of that action went to stock markets,” speculated Nicholas Colas, cofounder of DataTrek Research, in a note Wednesday. “Google Trends data supports that idea.”

More accounts were opened and dollars invested at E*Trade in the first quarter than in any prior full-year period, according to a company statement. The brokerage added 329,000 retail accounts and over $18 billion in net retail assets.

A week after Kelleher’s moves, Tommy McDougall, a retired firefighter, opened an account with E*Trade. He bought two shares of PayPal Holdings Inc. when the stock was trading at $92. It wasn’t much, but it was his first foray into investing. McDougall, a freelance podcast host on topics ranging from fantasy football to hot yoga, spends his days recording in a home studio and taking care of his four kids. Lately he’s been keeping an eye on share prices, too.

“When I put money into the market, I did have the theory that we had hit rock bottom,” said McDougall, 37, from his home in Bethpage, New York. “I’ve been checking in and trying to be in tune with the stock market more than I ever have in my life.”

Overflowing enthusiasm among mom and pop isn’t universally adored by market pros, given the tenuousness of the rebound. Confidence that President Donald Trump will quickly solve the pandemic crisis may prove unfounded, and as fast as these investors entered the market, they may flee, says Chris Gaffney, president of world markets at TIAA.

“It’s a question of how they react to the market sell-off,” Gaffney said. “If they don’t have the staying power that some of the institutional investors typically have that are more accustomed to these swings, it can create even more volatility.”

Steven Quirk, the executive vice president of trading and education at TD Ameritrade, says that’s an antiquated assumption, though. Historically, the brokerage’s clients have in aggregate bought and sold shares at opportune times, he said. They’re also accessing educational tools in record numbers.

Professional investors can debate the staying power of the rally. These believers are betting on unprecedented stimulus combined with curve flattening and re-opening economies, while bears highlight the depth of recession and a slow return to growth. What’s undeniable, though, is that retail’s fingerprints have been all over the rebound, raising questions over whether or not a true capitulation ever happened.

At Charles Schwab, clients opened a record 609,000 new brokerage accounts, with almost half of them created in March alone. The firm saw 27 of its 30 most-active trading days ever, including every session in March, Schwab said. Omaha, Nebraska-based TD Ameritrade observed record trading, account openings and net new assets of $45 billion --about 60% of which came from retail clients, as opposed to institutions.

“Retail investors -- with more time on their hands -- were watching and stepped in early, which considering the rally we have seen so far appears to be right on time,” Yousef Abbasi, global market strategist at INTL FCStone, said by phone. “That of course can change as we are still in a tape that is very susceptible to headlines around the virus.”

Before the coronavirus shuttered economies and sent stocks reeling, the sight of individual investors embracing the run was a key crux in bull cases across Wall Street. Late last year, multiple brokerages cut trading commissions to zero. That was expected to help the public fall in love with equities again.

Even in the midst of the most volatile period on record, it did. Kelleher says part of the attraction of opening a Robinhood account was that there was no fee. McDougall didn’t know if the economy would fall into a recession -- or worse, a depression -- but the E*Trade platform is very user friendly, he said. He got a call from an employee of the brokerage a few days in to make sure he was comfortable using the services.

“What’s happening right now is that fear has turned to greed for the retail investor. Nobody wants to be left behind,” said Jason Thomas, chief economist at AssetMark. “Have they been part of what has driven the market in the past month? I think so.”

Sector-focused equity exchange-traded funds have taken in more than $16 billion in April, the most for any month since 2016, Bloomberg Intelligence data show. So far in 2020, stock ETFs have taken in $60 billion altogether.

But even in the wake of increased interest, retail traders aren’t completely letting their guards down. A Charles Schwab survey of 500 active traders found 60% expect the stock market to remain in a bear market through the end of the year. That would mean they believe the rally they’re currently enjoying is likely to fade, demarcating the comeback as a bear market bounce.

Kelleher is staying vigilant to that risk. She monitors her portfolio daily and even used videos on YouTube to learn how to create her very own stock-watch list. She regrets not buying Square Inc., and has her eye on United Natural Foods Inc., among others. Still, with the coronavirus not yet contained, she worries.

“I would only say that I am being very conservative in the amount that I am investing because of not knowing what is next,” she said. “It’s coming directly from savings, and I just want to make sure we are covered in case everything closes down.”

©2020 Bloomberg L.P.