Monetary and fiscal stimulus led to a record number of participants in the US stock market. The retail trading community is larger than ever.
US stock market indices trade close to their record highs. During the pandemic, all major indices surpassed their previous highs without a meaningful correction.
It’s possible to find a number of factors explaining the sudden interest in the stock market. First, the Fed and the loose monetary policy could be a valid explanation. The lower interest rates turned investors away from other markets, such as the bond market. Because of the sharp rise in inflation, the real yield is negative. Hence, investors are willing to take additional risks and invest in the stock market despite sky-high valuations.
Second, the government’s fiscal stimulus and helicopter money triggered a rise in the savings rate. But, with inflation running at its highest pace in more than three decades, individuals used a big part of the money received to invest in the stock market.
Thanks to plenty of free time and capital at hand, investors turned their attention to the stock market – one that may offer bigger returns than the rise in inflation.
Strong Interest from the Retail Community
Robinhood is an emblematic brokerage house in the United States, famous for introducing fractional investing. As the chart below shows, the number of Robinhood users increased by 80% in 2020 and 2021.
The platform is favoured by younger, less experienced investors because most of the trades are free. According to data provided by the company in the documentation submitted ahead of its IPO, the average age of its users is 31 years old, and many of them are first-time investors.
In other words, the explanation for Americans’ appetite for risk comes from the monetary and fiscal policies in place. Higher interest rates are not coming any time soon, but inflation may still run higher, although it is only temporary. Therefore, the interest in the stock market will likely remain in place, regardless of the Fed’s message over the summer months.