A surge of often irrational investors into day trading during the Covid-19 pandemic is creating market distortions and making it harder for institutional investors to hit their benchmarks, says Jim Bianco, president and macro strategist at Bianco Research, L.L.C. In Chicago.

Speaking on Market Narratives, a podcast series hosted by Investment Magazine’s head of institutional content, Alex Proimos, Bianco said the shift of online brokers such as Robinhood to zero commission had already increased interest in day trading and self-directed trading before Covid-19 arrived. The advent of fractional shares had also made the market more accessible by allowing traders to buy, for example, 0.1 per cent of a share in Amazon for US$260 rather than a single share for US$2600.

Then the pandemic accelerated existing trends, Bianco said. With more time on their hands at home and seeing markets fall, the opening of day trading accounts leapt in March as young, hopeful investors rushed to buy stocks at reduced prices.

Among them has been a significant cohort of sports gamblers, encouraged by pundits like Dave Portnoy, founder of sports and pop culture blog Barstool Sports, who leapt into day trading in the absence of the usual sports that were the mainstays of his blog.

Bianco gave the example of Portnoy, who has 1.5 million Twitter followers, saying this month that he bought US$600,000 worth of stocks in pet retailer Chewy because stocks always go up, and he likes dogs.

“That’s it with the analysis,” Bianco said. “And there’s hundreds of thousands of people who listen to this guy and they all nod in agreement.”

To listen to the recorded interview with Jim Bianco on the Market Narratives podcast click above or find the series on Apple Podcasts, Google Podcasts or Spotify.

Bianco believes this is part of a major disruption going on at Wall Street, and having an over-sized impact on setting the prices of stocks at the margin. Young investors are rushing to buy fallen stocks with the belief that no major company will be allowed to fail, and the stock market always goes up, he said.

There are no good statistics on how big this is, Bianco said, but active retail trading accounts at major retail brokers in the United States now probably total 50 to 70 million accounts.

“So when you start taking these numbers and multiplying it by 50 to 70 million, even though we’re talking about a couple of shares here, maybe 50 shares there, maybe less than one here, it can add up to a sizeable number that can matter at the margin,” Bianco said.

For the last three months the simple strategy of buying broken stocks would have paid off, self-justifying the strategy, but it will probably end in tears, Bianco said. And it is becoming an issue for fiduciary investors who cannot copy this high-risk approach by causing the stocks they carefully select to underperform benchmarks.

A large number of irrational players gambling with their money (as opposed to the assumption that markets are operated by prudent and rational players) could create ‘mal-investment’ or distortions in the market, rewarding the wrong companies and not the good companies.

The increasingly heavy hand of the US Federal Reserve is also creating distortions, Bianco said.

Proimos asked Bianco about the importance of the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, Google/Alphabet) plus Microsoft, particularly to institutional investors.

Making up almost 25 per cent of the S&P500, it has been almost 50 years since such a small group of stocks has taken up this much of the market, Bianco said. And in previous times when there was such a concentration, the stocks were typically unrelated to each other, whereas the FAANG stocks are from the same sector, which he called ‘disruptors’.

“I believe if you look at Microsoft, which is the largest cap stock, I think it’s larger than the entire German stock market, or at least very close,” Bianco said. “So you have got to think about those stocks as being that important in that level. You will have a whole team of analysts to analyse what you are doing with Germany. Do you have a whole team analysing what you will do with Microsoft? It’s almost as important. So we need to start thinking about what that means for the market and we need to start incorporating their size into the market.”

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