Billionaire bond fund manager Jeffrey Gundlach said the
“retail investment fervor” that has developed during the COVID-19 pandemic is a
troubling sign for the health of the stock market.
Retail investing, or consumers managing their own small
holdings in financial markets, has surged with Americans trying to make use of
excess downtime forced on them by the coronavirus pandemic, potentially helping
to stretch valuations to near-historic levels.
“Retail investor activity is downright terrifying,” Gundlach
said on a conference call on Tuesday evening, pointing to the growth in daily
average trades and trades per account. “This is a terrible sign for the
condition of the market for anybody who's experienced a significant number of
cycles.”
Retail investing has experienced a rebirth over the past
year, with nearly 800,000 new accounts opened at the three biggest brokers in
March and April as lockdowns aimed at slowing the spread of the COVID-19 pandemic
allowed people to focus more on investments just when online brokers were
slashing commissions to zero, breathing life into an industry that had been
left for dead.
The rise of the retail investor has come amid an unforgiving
news cycle that has kept stock-market volatility elevated despite the major
averages moving to record highs, typically a sign of investor calm.
The CBOE Volatility Index, often referred to as the stock
market’s fear gauge, last week closed at the highest level on record for a period
in which stocks were at an all-time peak.
At the same time, retail investors, who are typically
thought of as “dumb money” by Wall Street pros, have over the past six months
helped drive price-to-earnings ratios up by the most in 30 years, resulting in
a “melt-up of historic proportion in terms of its speed,” Gundlach said.
Before the stock market’s three-day selloff began on
Thursday, surging prices had stretched the S&P 500’s price-to-earnings
ratio into the 99.6th percentile, just below the level at the height of the
dot-com bubble.
Eight mega-cap tech stocks – Amazon Inc., Apple Inc.,
Alphabet Inc., Facebook Inc., Microsoft Corp., Netflix Inc., Nvidia Corp. and
Tesla Inc. – accounted for 48% of the Nasdaq’s $18.3 trillion market
capitalization.
“This is not a cheap market,” Gundlach said.
Click
here for the original article.