Retail Investors Have Come Back To The Stock Market

Retail Investors Are Back

Previously in a recent cycle, retail investors were still bearish on stocks. That has changed. The timing of these surveys is critical because retail investor optimism has exploded in the past couple of weeks. 

Retail investors missed the rally in the first few weeks of 2019, but have since piled into stocks. That’s usually bad news for stocks. When the dumb money is fully invested, there are few bears left to convert to provide fuel for a rally. 

Bull markets are built on fear and skepticism. Bear markets are built on euphoria.

As you can see from the chart below, the AAII investor survey shows the huge boom in allocation to stocks recently. It is almost as high as last year’s peak. 

Retail investors increased their allocation to stocks to 71% and decreased their cash position to 13%. The chart shows the difference between the two. The red dots on the S&P 500 chart are when this difference has been above 57.5%. 

This level of exposure was breached in the late 1990s when the stock market was in a major bubble. Even though the exposure is almost the same now, I’m not expecting a similar downside to the 2000-2002 bear market. Stocks aren’t as expensive.

(Click on image to enlarge)

Retail Investors - China Is Still Slowing

We’ve been hearing about the Chinese soft landing for years, but growth is still slowing quickly. China seems to be having a hard landing. 

According to the IDC, iPhone shipments in China fell 19.9% in Q4 because the phones were too expensive. While this is a problem for Apple, it’s also a major problem for China as it signals the consumer is pulling back on spending.

As you can see from the chart below, Chinese retail spending for the New Year holiday only grew 8.5% from the previous year. That’s down from 10.2% growth in 2018. 

Last year was a terrible one for China. Since growth fell more than it did last year, 2019 should be worse. The Chinese state-run paper, Xinhua, stated: “It is not difficult to determine that this year our country’s economy will continue to bear pressure, with a conservative estimate for full-year cumulative growth of about 6.3 percent and the possibility that growth for the present quarter could reach 6 percent.” 

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