The average investor’s response to the pandemic-driven stock market sell-off has really been quite stunning.
Far from panicking into the same mistakes that mom-and-pop made during the financial crisis , there’s evidence that we’ve grown more bullish on stocks than ever.
So why are so many of us cutting our losses and cashing out?
This week, the Fed released the latest data from its monthly consumer expectations survey. While sentiment about the overall economy was nothing short of brutal, optimism about the stock market exploded to new all-time highs.
The Fed’s data only goes back to 2013, but it’s not the only indicator of raging retail investor confidence.
Searches for “buy stocks” spiked to record levels in late March, just as the S&P 500 was careening into the fastest bear market ever.
Retail brokers TD Ameritrade and Etrade experienced 150% spikes in new users during the first quarter , adding 608,000 and 363,000 accounts, respectively. Robinhood – which caters to younger investors – onboarded a staggering 3 million new accounts.
Everyday investors bought the dip aggressively, and at least so far, they’ve been richly rewarded. That may change if the bears are right and the recovery turns out to be a dead cat bounce. But for now, it looks like the “dumb money” waltzed into the Wall Street casino and drew an inside straight.
If only it were really that simple. But unfortunately, this isn’t a story about the little guy pulling one over on the big banks.
In Vegas, the house always wins. And for a growing number of people, that’s how Wall Street feels too.
Because although millions of new investors piled into the stock market in February and March, even more investors were piling out.
And not by choice.
According to a recent MagnifyMoney/LendingTree survey , a stunning 49% of U.S. households with retirement savings had either withdrawn funds since the pandemic started or plan to.
Additionally, 47% of respondents said they had reduced their retirement contributions or halted them altogether.
Add to that the quarter of Americans who already had no retirement savings , and the outlook for the U.S. wealth divide looks bleak.
As LendingTree’s Sarah Berger comments:
The sheer number of Americans who are dialing back on what should be a main financial priority underscores the dire financial state that many people currently find themselves in, as the economy continues to grapple with the havoc caused by COVID-19.
The percentage of Americans invested in the stock market never recovered to pre-Great Recession levels in the decade following the financial crisis. It’s hard to see that changing anytime soon.
If anything, this survey makes it look like the trend could get even worse.
It would be one thing if investors were cashing out because they believed the stock market was going to crash even harder. That’s something that defies most conventional investment advice , and it’s a choice investors would have to live with (and deservedly so).
But that’s not what the survey found. Only 15% of people who had withdrawn funds cited “concerns over losing money in the stock market.”
The overwhelming majority – a combined 78% – withdrew funds due to job loss or to cover essential household expenses. Sixty percent said they needed the money to buy groceries.
Against this backdrop, investor optimism about the stock market feels a lot less… optimistic. Even a bit morose.
There’s a palpable sense of exasperation from the data. People know they’re missing out, but they don’t feel like there’s a damn thing they can do about it.
Sixty percent of people who withdrew funds said that they regretted it. But when you’re out of work and not sure when (or if!) your unemployment claim will even get processed , what choice do you have?
The mood is particularly sour among some pockets of my generation, which entered the workforce in the carnage of the post-financial crisis economy – after the stock market recovery but before the labor market had shaken off its slump.
A decade later, the “generational” investing opportunity we’d been waiting for all our adult lives finally arrived. But now that it’s here, the only thing we wish is that it would just go away.