TOPLINE
The flood of new retail investors making speculative stock trades are not behind the market’s recent rally, according to new research from Barclays which found that many of Robinhood users’ top picks tended to underperform.
Robinhood customers piling into a stock usually resulted in lower returns, Barclays found.
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KEY FACTS
Barclays analyzed Robinhood customer holdings and compared them to daily market returns and concluded that there’s “no clear relationship” between retail investors adding shares and S&P 500 index moves.
The research “casts doubt on the idea that retail holdings are the cause of market returns,” according to Barclays analyst Ryan Preclaw.
The idea that new investors using zero-cost brokerage firms like Robinhood were driving up the market has become a popular narrative on Wall Street.
“Since March 2020 we have seen the opposite of the conventional wisdom—all else equal, more Robinhood customers moving into a stock has corresponded to lower returns, rather than higher,” Preclaw wrote.
Barclays’ analysis found that for all the Robinhood investors cashing in on the stock market’s rebound over the past few months, just as many are getting it wrong and losing money: Overall, Robinhood traders’ top picks are underperforming.
Barclays found that there’s “a negative correlation between a change in the number of Robinhood customers holding a stock and the return of that stock.”
Crucial quote
“Just because two things happen at the same time doesn’t mean one causes the other,” Preclaw said. “And while it’s true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase.”
Key background
A wave of new retail investors piled into zero-cost brokers like Robinhood, Charles Schwab and TD Ameritrade as the market hit a coronavirus recession low point on March 23. Robinhood, for instance, saw a historic 3 million new accounts added on its platform during the first quarter, as stocks plunged in the fastest bear market on record. Barclays’ analysis uses data from Robintrack, a separate platform which tracks the number of Robinhood users holding a stock over time.
Surprising fact
CNBC anchor Jim Cramer recently speculated that Wall Street veterans could be buying popular Robinhood stocks early in the day, then flipping them to retail investors at higher price once the market opens. “It’s a game,” he described.
Further reading
Stock Market Rout: Here’s What Caused The Worst Sell-Off Since March (Forbes)
Dow Falls 1,800 Points Amid Fears Over A Second Wave Of Coronavirus Cases (Forbes)
Dow Falls 250 Points After Federal Reserve’s Grim Economic Outlook (Forbes)
Federal Reserve Will Keep Interest Rates Near Zero Until 2022 (Forbes)