Interest in trading and investing activities reached historic highs during the COVID-19 pandemic. US households’ asset weight as percentage a of liquid financial assets show an increase in equity ownership, justifying record-high market prices.
The US equity markets sit at or close to their all-time highs, despite the Federal Reserve of the United States signaling its willingness to taper the asset-purchases. What makes equities so resilient and how come the interest surrounding investing and trading activities reached record highs during the pandemic?
To answer these questions, we must start from the very basic principle of supply and demand. When more people are coming to the market with money to invest, the chances are that the financial assets will see their prices rising.
One might say – how do we know that investors went long and not short? The answer comes from the tendency of the average investor to favour the traditional long portfolio. Also, going long on an asset has a limited downside, but when shorting an asset, the downside is unbounded. Hence, the vast majority of retail traders buy, and do not sell.
COVID-19 Pandemic – Opportunity for Younger Generations to Invest?
In a strange turn of events, the COVID-19 pandemic and economic recession that followed did not bring a reluctance to invest. Surely enough, savings rates increased, but at the same time, we see that so did equities held indirectly by US households.
Moreover, bank deposits and investments in bonds declined significantly. Did all generations act the same during the pandemic? The answer is no. Also, where did the money come from, apart from the state support?
Baby boomers did not favour taking on debt to invest during the pandemic, nor did most of the generation X-ers either. But we do see that generation Z (born mid to late 90s and until 2010s) took massive debt and poured money into the market. Overall, 60% of Americans took on debt during the pandemic to invest in the markets.
A further look at where the money came from reveals a combination of personal loans, borrowing from friends or family, and even credit card debt.
It is no wonder, therefore, that monetary authorities have a hard time coming up with proper communication to remove the accommodative monetary measures. Any taper tantrum will have a negative effect not only on the stock market prices but on the ability of US households to service the new debt.