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Small investors are taking an unexpected break. Here’s why


After a raucous start to the year, Wall Street expected non-professional traders to pump chunks of their $1,400 stimulus checks into the stock market, supporting popular names like Tesla and Apple. So far, that doesn’t appear to be happening.

Breaking it down: Retail investors who helped power GameStop mania haven’t been rushing to buy their favorite tech names, meme stocks or short-dated call options with the ferocity they exhibited in late January and early February. Daily net purchases of US equities by retail traders dipped in late March, just as stimulus checks were hitting bank accounts, data from Vanda Research’s VandaTrack shows.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said this is a major reason that the VIX, a measure of US stock market volatility, recently fell to its lowest level since February 2020.

“The drop in the VIX is in part due to less retail speculation and call buying,” Boockvar told me.

What’s caused these traders to take their foot off the pedal? As inflation fears ricocheted across markets, stocks that had exhibited lots of momentum, benefitting the retail crowd, started to reverse course. Apple dropped 8% in February, while Tesla shed more than 15% in February and March.

That spooked small investors, who are very sensitive to these changes, Vanda Research cofounder Eric Liu said. When the value of retail portfolios falls back, that often leads to changes in buying habits.

“There’s a clear relationship between how retail performs today and their proclivity to invest tomorrow,” Liu said.

He doesn’t expect retail to stay on the sidelines indefinitely, though there’s a sense now that investors are looking for their next obsession. Recently, there’s been significant investment in broad exchange-traded funds, which indicates there’s not a lot of conviction about the Next Big Thing, Liu added.

If Big Tech starts to consistently rally again, the calculus could change, and February’s fears may be cast aside. FAANG stocks — Facebook, Apple, Amazon, Netflix and Google — plus Microsoft make up about 28% of the typical retail portfolio, according to Vanda Research.

“If you get those big growth names outperforming again … then you see retail come back in again,” Liu said.

On the radar: This could happen before long. Apple, Amazon and Microsoft have already gained 9% in April, while Google parent Alphabet has added more than 10%. With earnings season coming up, strong results could help these stocks move higher, encouraging retail to rejoin the fold.

But they also remain exposed to concerns about higher prices once the economic recovery takes off — a trend that hurts fast-growing shares.

“If there’s one thing that upsets the apple cart, it’s a move higher with rates and inflation,” Boockvar said.

Alibaba will survive record fine, but it’s still a ‘warning shot’

Alibaba is trying to draw a line under accusations that it behaved like a monopoly after Chinese regulators hit the online shopping giant with a record fine over the weekend. But that doesn’t mean the crackdown on tech in China is over, my CNN Business colleague Laura He reports.

The latest: Joe Tsai, Alibaba Group’s co-founder and executive vice chairman, told investors on Monday that the company will not appeal the 18.2 billion yuan ($2.8 billion) penalty that China’s State Administration for Market Regulation imposed on the business.

Regulators had investigated Alibaba for “exclusive dealing agreements” that prevented merchants from selling products on rival e-commerce platforms.

The fine is equivalent to 4% of Alibaba’s sales in China in 2019, state news agency Xinhua reported, and dwarfs the previous record penalty of $975 million handed out to American chipmaker Qualcomm in 2015.

It could have been worse, and the outcome has removed a key source of uncertainty for Alibaba and its investors. Shares rallied 6.5% in Hong Kong on Monday, though the stock is still down more than 20% since last November, when regulators pulled affiliate Ant Group’s highly-anticipated public offering. The company’s stock in New York is up 6% in premarket trading.

But Wall Street shouldn’t get complacent.

The fine is a “warning shot across the bow for the entire big tech sector in China,” said Alex Capri, a research fellow at Hinrich Foundation and a visiting senior fellow at National University of Singapore.

Brock Silvers, managing director of Chinese private equity firm Kaiyuan Capital, said the incident is an example of how “opaque policy and private political maneuvering” can suddenly erase shareholder wealth.

“Regulators are now preparing to increase their battle against China’s corporate titans, which should be quite worrisome to global investors who may be increasingly exposed to China risks that have long been unseen and remain unquantifiable,” Silvers said.

Levi’s stock jumps as jeans make a comeback

Stock in Levi Strauss is soaring as people get ready to squeeze into their denim again.

The latest: Shares of the company, which went public in 2019, are at an all-time high after the company reported earnings last week, my CNN Business colleague Paul R. La Monica reports.

Overall sales were down due to store closures tied to the pandemic. But the company said digital sales soared more than 40%, and now account for more than a quarter of overall revenue.

Levi Strauss CEO Chip Bergh told analysts that a “denim resurgence” is boosting the entire casual clothing industry. It helps that for many, workwear is expected to stay relatively casual even after people return to the office.

“I feel much more confident today than I did even a month ago about our ability to come through this pandemic in a much stronger position,” Bergh said.

Investor insight: Levi’s stock has rallied 28% this year. Rival Kontoor Brands, which owns Wrangler and Lee, has jumped more than 40%.

Up next

Coming tomorrow: The US Consumer Price Index will shine a light on whether prices are increasing as the recovery gathers steam.

Article Topic Follows: Money

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