Be Mindful of Excessive Speculation
Soaring interest among the public in the stock market. People day-trading to earn quick fortunes. If you didn’t know otherwise, this sounds like a description of the late 1990s, a time characterized by a frenzy for technology stocks as the internet came into its own.
But history has a way of rhyming, and the above actually describes today’s stock market.
Free Commissions + Boredom = Speculation
Ever since the market collapsed into late March, a curious thing has happened. Millions of new online brokerage accounts have been opened, many by beginner investors. What underlies this phenomenon?
There are a few possible explanations:
- With equities down so much, some individuals may have decided it was time to scoop up bargains.
- Some trading platforms, such as the well-known RobinHood app, allow investors to trade without incurring any commissions. This makes short trading more feasible.
- Boredom and a need for a fix: As the economy shut down, people were stuck at home and many were probably bored. The stock market offered to some of them a new game to play. This is especially true for those who may have previously gone to casinos (which weren`t open) or bet on sports (which were cancelled).
Amid this increased trading by new investors, there have been some concerning signs of rampant speculation in some stocks. For example, traders have piled into shares of companies such as Hertz (the rental car outfit) that are in bankruptcy protection. This makes little sense, because debt holders may end effectively controlling these corporations, with perhaps nothing left over for shareholders.
Companies that don`t find themselves in bankruptcy protection have also seen stunning rises in their shares. Tesla`s stock price, for instance, went absolutely parabolic in July. Believe it or not, the market was valuing it at more than Volkswagen, Toyota, and Honda, combined. While it may have promising technology, this valuation does seem stretched to say the least.
The lesson of this rise in speculative activity is that it`s important to remain well-diversified and stick to your long-term plan. We`ve seen numerous examples throughout history of manias in various securities. They don`t tend to end well, to say the least.
A Generational Gap in Attitudes
You`re probably wondering where the market goes from there. The answer could well turn on how different generations of investors act. On the one hand, there does seem to be froth (at least in some stocks) generated by younger investors. Indeed, according to the American Association of Individual Investors (AAII), millennials have been putting money into the market. Any retreat by this cohort could spell trouble for equities.
That said, many strategists believe the market could be supported by older investors. This group, the AAII reports, has remained cautious despite stocks staging a strong rebound off the panic lows in March. And their hesitancy is one of the reasons that nearly $5 trillion of cash is currently parked in money market funds. This mountain of dry powder could support markets on any corrections.
Long story short, it`s a market of young guns and old hands. We`ll see how it plays out as the summer and fall unfold.
