Cash on the sidelines is starting to move into stocks and retail traders can get the last laugh with this new bull market.
After hitting a record of $4.8 trillion following the market’s biggest panic in over a decade, money market funds are starting to decline. Why? The Robinhood-fueled retail trading frenzy is now beginning to make other investors feel left out.
There’s long been a theory in the stock market that investors would eventually put their excess cash to work.
It’s a saying that follows every market crash. Now, with the fastest rebound from a bear market in history, it’s happening. That means the stock market could continue to break even higher.
Yes, stocks could head even higher despite the fact that companies like Apple (NYSE:AAPL) and Tesla Motors (NASDAQ:TSLA) saw their shares surge nearly 30% each just for announcing a share split. Historically, a shares split shouldn’t move stocks as much, but impatient retail traders know that it’s bullish over the long haul.
Add in some other bizarre moves from the Robinhood crowd, like buying shares of bankrupt companies, and it’s easy to see why big money has sat on the sidelines until now.
The big, institutional money now has a reason to finally put their capital to work, even with markets at all-time highs. That’s because they now know the climate is right for investing in the stock market for years to come.
Investors will want to reduce their cash levels following the latest development from the Federal Reserve. Chairman Jerome Powell announced Thursday that the central bank is changing how it viewed the trade-off between unemployment and inflation.
The critical shift is a focus on where unemployment levels are at, rather than inflation. Given the current double-digit unemployment, it’s now likely that this latest round of zero-percent interest rates will persist for years.
With both interest rates and inflation rates low, the real returns on stocks relative to bonds (ask your grandparents what those are) or cash in a money market fund look far more attractive, even with stocks at historically high valuations.
Why settle for 2% in government bonds when you can get a stock that rallies 30% just for announcing a stock split?
With this strong underpinning for the stock market, the chance of a severe market decline has become significantly lower. However, the market can be prone to sharp pullbacks, should the same retail traders that jump into a stock decide to withdraw their capital en masse.
So, enjoy your victory lap on this one, retail traders. It was definitely because of you. I’m serious!
Think about it this way: Big money is jumping in because the Fed is going to backstop the party for some time. The Fed came to the party to avert the disaster that would have occurred if retail traders continued to dominate the market and create even wilder moves.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: September 23, 2020 2:27 PM