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The Ugly Truth of Bullish Stocks

 

(Mon, 18 May 2020). Americans want to buy stocks, but nearly half are cashing out retirement funds. It would be one thing if investors were cashing out because they believed the stock market was going to crash even harder. But that`s not what the survey found.

Multiple data points suggest Americans are more bullish on the stock market than they have been in years – maybe ever. Yet nearly half of U.S. households are cashing out retirement funds. Millions of U.S. consumers want to buy stocks. So why are they selling instead? 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?

 

Strange Bull

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.

Google searches for “buy stocks” smashed records in March, just as the market was crashing toward its lows. 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.

 

Half Of U.S. Households Are Cashing Out Retirement Funds

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.

Americans are selling stocks during the coronavirus pandemic. Approximately 30% of U.S. households have already cashed out retirement funds since the coronavirus pandemic arrived. Another 19% say they haven’t yet but plan to soon. 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. U.S. stock ownership never recovered after its financial crisis plunge. Now it 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.

 

The House Always Wins

Americans didn’t withdraw retirement funds because they were bearish on stocks. They overwhelmingly blamed their decision to cash out on job loss and essential expenses. 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.

 

 

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