May 21, 2020 - Economy & Business

The stock market's speculative frenzy

Felix Salmon, author of Edge

Illustration: Sarah Grillo/Axios

Never has the stock market seen so much gambling. Volume is at record highs, with individual stocks and the market as a whole feeling almost manic. More people than ever are betting more money than ever on which way stocks will move, in a frenzy that feels more like a casino than a safe place for long-term capital appreciation.

Why it matters: Legendary value investor Ben Graham said that in the short term, the market is a voting machine, but that in the long term it's a weighing machine. Right now there is no shortage of votes, but few people believe that the weight readings are remotely reliable.

By the numbers: The stock market saw a record $14.6 trillion of volume in March, according to Cboe data. That's exactly double the $7.3 trillion of volume a year previously, in March 2019.

  • April's volume was $9.8 trillion, up 50% from the same month in 2019.

The big picture: There are a lot of drivers for the speculation.

  • Zero interest rates. Interest rates are the cost of money. When the Fed slashes rates to near zero, that means money is effectively free — and that expected profits years in the future are worth almost as much as real profits today. The result is that stocks have no real limit on how much they can rise.
  • Bearishness. Stocks famously "climb a wall of worry": They often rise more strongly when investors are bearish than when they're bullish. And investors are very bearish now: As Bloomberg's John Authers reports, a BofA Securities survey shows only 25% of them thinking that we're in a bull market, and a mere 10% of them believing that there will be a V-shaped recovery.
  • Value vs. momentum. There's a decades-long argument between value investors — the "buy low, sell high" crowd — and momentum investors, who prefer to just buy when stocks are going up and sell when they're going down. The gap between them is greater than ever, with every value investor convinced that the market is overvalued, and every momentum investor strapped in to the upside rocket ship. The result is ever-increasing wagers on both sides.

For individual investors, there are more reasons still:

  • Most retail investors now pay $0 for stock trades, and individuals tend to overconsume anything that's free and that provides a dopamine rush — especially when they're stuck at home with nothing better to do. As Axios' Dion Rabouin has reported, online brokerage accounts are being opened at a record rate.
  • Nobody knows anything. To oversimplify only a little, retail investors have been "buying the dip" and buying hot stocks during the rally while professional investors have been bearish. When the institutional "smart money" has a bearish bias and therefore has been underperforming small investors, that makes the stock market look like a more attractive place to try to make extra money.
  • They're playing with the house's money. If you have a $100,000 stock portfolio, then about $25,000 of your money has magically appeared during the rally of the past two months. It's even more than that, if, like many young investors, you're largely invested in tech stocks. Because that feels like a windfall gain, it's easier to gamble with.
  • There's no sports. For millions of people, betting on sports provides their gambling outlet, allowing them to be more sober and sensible in the market. But there aren't any sports on right now, so, as the FT's Richard Henderson reports, they're gambling on stocks instead.

The bottom line: The whole world feels a bit like a fever dream right now. In a dream world, all you need to do is name your electric-vehicle manufacturer after Nikola Tesla, allow retail investors to bet on it, and see it worth $12 billion. Lewis Carroll wouldn't blink an eye.

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