The US stock market is reeling under the anxiety of inflation and rising interest rates that might hit them. But the market is not showing any weakness.
US market indexes such as S&P 500, Dow 30, Nasdaq Composite and Nasdaq 100, trading at higher levels and gaining strength. Three months ago, they are up between 2.5% and 5.95%, and recently it is between 17% and 23%.
The more plausible reason behind this could be the arrival of retail investors. They are or could be playing outsized support to the market. The world saw their strength during the GameStop and AMC Entertainment market squeeze.
There are sceptics for this whole retail investor phenomenon, as they argue that it is a temporary trend, just a fad.
But others treat it as a positive sign and prefer them to continue investing since they are doing it disregard of inflation and supply crisis.
If history has taught us many lessons, one such is, things we often categorize as fad will remain to stay and change the course of human life. And these retail investors could be just that.
According to Lisa Shalett, the Chief Investment Officer, of Wealth Management, in Morgan Stanley, in her Global Investment Committee Weekly report, states that this phenomenon could be due to FOMO or the fear of missing out.
These retail investors have been the most active participants in the market since the pandemic hit the market. They seem to be buying up securities at low prices in the hope of better prices in the future.
One can even say that they are driving the market.
Even the data shows it as retail daily net inflows have risen to $1bn in 2020, i.e., the inflows have risen three times since the pandemic began. The 2018-2019 market only averaged at $360mln.
But this trend may be slowing down as, according to Andrew Sheets, Morgan Stanley Chief Cross-Asset Strategist, the amount on household balance sheets is consistent with 1989 levels.
He also notes that the volatile household asset, equity holdings, as a household wealth is at an all-time high. This implies that while individuals can place more cash into the market, many may decide that this much exposure is enough.
Even though it may be a market runner, there are certain risks associated with it, such as tightening financial conditions and weakening market liquidity.
The Fed is probably going to initiate tightening its asset purchases, diminishing the current month to month pace of $120 billion by $20 billion to $30 billion per month through next June.
Also, the U.S. Treasury will be approved to restart issuing debts following the lifting of the federal debt ceiling, which might deplete as much as $720 billion.
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