As you might imagine, I do quite a lot of reading every day. I try to share it with my readers when I see an idea that catches my eye. I try to understand what’s really going on and how people feel about what is going on. It’s important to know the trends and narratives that are critical to market participants and where are they in their life cycle.
One trend I’ve noticed recently is the growing participation in the financial markets by young individuals. Since many discount brokerage firms went “commission-free” recently, following in the footsteps of a firm named Robinhood, the interest in quick trading has gone up significantly.
Of course, you have to ask the question, “If brokerage firms are letting you make trades with no commissions, how are they making money?” It’s a good question that you should ask. I suspect they are not doing it out of the goodness of their hearts. But that is a subject for another day.
The stock market has set many new records in 2020. After putting in the fastest 10 percent decline from a new high, it then put in the fastest 20 and 30 percent declines. Since then, however, it’s now put in the fastest recovery in history from a crash. An unprecedented boom in money printing for the explicit purpose of supporting asset prices is certainly part of the reason for the recovery. But it is also important to note that money printing has inspired an unprecedented boom in financial market speculation by retail traders.
If you combine massive money printing by the Federal Reserve with mass speculation and record low liquidity (in the futures and almost every other market), you get the fastest 50-day rise in the stock market on record. As a result, we now have an army of traders who believe they are the second coming of Warren Buffett. While the Oracle of Omaha now looks foolish for selling his airline stocks, those who bought them up over the past several months are gloating like you rarely see in this game. An old Wall Street saying is, “Everybody is a genius in a bull market.” The largest 50-day gain in history is creating a lot of geniuses right now.
To get a sense of the mindset of many of these traders, the Wall Street Journal spoke to a few of them, and they make no bones about gambling with the funds the government sent them as part of the CARES Act, trying to double or triple it in just a day’s time.
In 1999 and 2000, day traders went for the hottest internet stocks of the day in trying to make big returns. (Do you remember the E-Trade baby commercial? Quit your job and just day-trade for a living.) Eventually, many of those traders went bankrupt and went back to real jobs. Today, many people are looking for out-sized returns in the stocks that have already filed for bankruptcy protection!
If there’s a lesson from that earlier period, it’s this: This rally has humbled not only Warren Buffett but also many other legendary investors who have bet against it. It seems like it may soon be time for it to carry out those betting with it.
Many of the current cadre of young traders are part of the Millennial generation. Technically, the millennials are those born between 1981 and 1996 and are currently between ages 24 and 39. Unfortunately, I think that many of the millennials are about to learn that they don’t know that much about stocks and how the stock market works over time. This is a tough business, and experience counts for a lot.
Now don’t get me wrong. I love the millennials. As a baby boomer myself, they are the first generation to come along that is as large as we are, and they are going to change and determine the course of most things just like we did. Sometimes it was for the good and sometimes not so much. Of course, we thought we knew it all when we were younger, and we all learned along the way. I feel a certain kinship with the millennials and look forward to all the great things they are going to do. But it won’t be without its challenges.
Currently, baby boomers and millennials hold different views. They live different lifestyles and they are investing in stocks right now with completely different attitudes. Millennial investors and young traders are in the news lately as they bet on bankrupt companies. Bond prices indicate these stocks are headed down. Yet they are popular among newer millennial investors who don’t seem to be doing much research on their stocks.
Millennial investors also started buying options. Volume in these markets is at record levels. And most of the volume is in call options, indicating traders expect more gains in stocks. Right now, traders are loading up on calls. I am constantly reminded of what some of my mentors drilled into my head when I was a young stockbroker in 1977 — “If everyone pretty much agrees on what is going to happen, then something else is likely to happen.”
It seems safe to say that many millennial investors buying calls today don’t know what happened in 2008. They’ve never seen a bear market. Experience can be a tough teacher. Generally speaking, younger traders are quite bullish right now, and older ones like me are cautious or bearish. Someone is wrong. Be careful out there. Thanks for reading.
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About Nick Massey
Nick Massey is President of Massey Financial Services in Edmond, Oklahoma. Nick can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.