Millennials are continuing to pile into the stock market even as hedge funds caution about the strength of this FOMO rally.
The stock market’s epic rally over the past two months has created a debate between Wall Street’s heavyweights and an unlikely army of millennials.
Younger traders are piling into equities, betting that the U.S. economy is heading for a sharp recovery that will eventually support the market’s ballooning valuation. But many of Wall Street’s elite are pounding the panic button and warning that this FOMO rally is bound to come crashing down in the months ahead.
Trading app Robinhood is having a moment in the sun as millennials use its low-cost investing model to access the stock market at one of its most volatile periods in history.
The firm said it saw a record number of signups in the first quarter as the market took a nosedive. Despite the S&P 500’s 30% rise since then, millennials are still buying.
Millennials have been a vital driver of the stock market’s FOMO rally because they can use their age to their advantage. According to Robinhood, many of the trades millennials are placing have been in beaten-down sectors such as airlines, and they’re often long positions.
By contrast, many hedge fund managers are starting to turn negative on the market after its meteoric rise. They argue that the market has gotten ahead of itself in recent weeks and that the reality of the economic devastation caused by the pandemic will eventually set in.
Dymon Asia Capital’s Danny Yong says the market has become detached from reality. He has been buying puts to protect his fund from another major correction:
I believe we will see new lows in global equity markets later this year. As March…has shown us, prices cannot diverge from fundamentals for too long.
Elliot Management, which controls $40 billion worth of assets, noted that the overall trajectory of the stock market is likely lower:
Our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets
The Federal Reserve’s unprecedented intervention has many feeling confident that the market can remain detached from reality until the economy can catch up. That appears to be the mantra than millennial investors live by, and some of Wall Street’s big wigs agree— it’s dangerous to bet against the Fed.
CEO of Aperture Investors Peter Kraus has pointed to the magnitude of coordinated stimulus packages as a reason to continue betting on the stock market.
The market is going to continue to trend higher here. I think the Fed stimulus, central bank stimulus around the world, fiscal stimulus in significant quantities, the prospect of additional stimulus which the market expects is going to take place, and the expectation of therapies and vaccines in the future all basically allow the market to continue on its upward trajectory.
But there is a limit to what central banks can do to prop up the stock market. Some of the responsibility falls on the U.S. government. That is where things could get dicey.
Consumer spending in the weeks ahead could make or break the stock market’s recovery and its unclear whether or not that will happen.
Americans increased their savings substantially in April; now it’s a matter of getting them to return that cash to the economy. But many are still grappling with uncertainty over whether their job loss will become permanent, and that could put a damper on spending.
More fiscal stimulus is likely needed to inject confidence into U.S. consumers, something Donald Trump has been trying to push through. But Trump will likely face a great deal of resistance from Democrats in the House.
So, who will come out on top as the FOMO rally marches higher? For now, it’s the millennials who’ve been riding the stock market’s recovery since March as their billionaire counterparts sit on the sidelines.
But as Kraus pointed out, markets are expecting more stimulus. If it doesn’t come, that could be the first domino to fall, kicking off a correction that would prove the hedge funds waiting for the other shoe to drop right.
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-menitoned companies.
Last modified: September 23, 2020 1:58 PM