The New Day Traders and Another Market Crash: Is This Déjà vu All Over Again?

Shah Gilani|June 17, 2020

As Yogi Berra famously said, “It’s like déjà vu all over again.”

I’m talking about the parallels between the day trading craze in the 1990s that helped fuel the 2000 “tech wreck,” and today’s retail investors driving stocks higher in the wake of the coronavirus pandemic.

The question now is, what will happen to the market if stocks, pumped up by retail speculators, falter like they did in the dot.com bust?

Here’s what happened with retail investors in the 1990s, what they’re doing now, and what could happen to the stock market.

Are Those Who Forget History Doomed to Repeat It?

The 1990s saw an explosion of retail interest in stock trading… in addition to angel investing. Besides investing in hot Internet and dot.com stocks that seemed to come to market in a flood of almost daily IPOs, retail trading became popular.

Let’s start with retail trading.

The day trading phenomenon spawned competing trading rooms and offices equipped with everything from state-of-the-art ECN (Electronic Communications Networks) access to fundamental and technical analysis trading tools. Thousands of so-called retail traders saw themselves as professionals and hoped to make trading from home or a day trading office their new careers.

From 1995 to mid-2000 brokerages brought on more than 12.5 million new “online” accounts. By year end 1998 online trading accounted for about 37% of retail trading volume in equities and options.

Retail investors and traders were drawn to all the “hot stocks” of the day, which sometimes changed from day to day, buying them on momentum moves higher, in the process creating more momentum, and drawing in more traders and investors.

They were heady days.

Markets began to resemble casinos and in December 1996, then Fed Chairman Alan Greenspan, famously commented on the market’s uptrend and retail participation citing what he called “irrational exuberance.”

Still markets continued higher.

From 1995 to March 2000 the Nasdaq Composite soared from 1,139 to 5,048.

The rest they say, is history.

As if waking up to reality, investors and traders suddenly realized the stocks they had chased up to insane levels didn’t have revenues, let alone earnings or profits. They had been bid up furiously based on how many “eyeballs” they could attract without much consideration as to how companies could eventually “monetize” those eyeballs.

The Nasdaq Composite fell a whopping 86.5% in the so-called tech wreck that followed and took 15 years to make up its losses.

The private markets, on the other hand, exploded.

Angel investing became a “thing” around this time, and by 1999, there was nearly $180 billion of total capital in venture firms. While the broader markets sank like a stone in the Mississippi, the private market soared.

Investors were walking away with 200%. Out of the $180 billion that went into the private markets, angel investors were getting $325 billion back.

All while the broader markets went down.

That’s the beauty of the private markets, and these metrics are very true today.

If history is repeating itself, and it sure looks like it is, make sure you’re prepared. The private markets may be the safest way to go.

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2020 is Making the “Tech Wreck” Setup Look Like Child’s Play

Interestingly, since the beginning of 2020 and the onslaught of the coronavirus pandemic, retail interest in the market, in investing and trading, has soared again.

Only this time the number of retail accounts and the amount of money retail investors are throwing around makes the surge in retail interest in the 1990s look like child’s play.

TD Ameritrade Holdings Corp. says its seen record retail account openings this year, with new assets exceeding $45 billion.

E*TRADE Financial Corp. opened more new retail accounts in the first quarter of 2020 that its ever opened in any full year. The discount brokerage opened 329,000 accounts with $18 billion in new money flowing in.

Charles Schwab Corp. added 609,000 new accounts in Q1/2020 and another 1.25 million accounts in May.

Robinhood Markets Inc. added an amazing 3 million new accounts so far this year and boasts 13 million accounts now.

And not unlike the 1990s, retail investors and traders are driving markets higher.

Whether they’re buying beaten-down cyclical stocks like airlines, cruise lines and banks, or buying pricier mega-cap tech stocks because they can afford to buy “fractional shares,” they’re going for broke.

The phenomenon may be the result of being locked down from the pandemic, being bored, not having sports to bet on, or rushing to “buy the dip” after stocks fell hard and fast from February to March 23, 2020.

Whatever their motivation or reasoning is, they’ve become the tail wagging the market dog.

Retail buying helped the Nasdaq Composite soar off its lows and break the 10,000 mark for the first time ever last week.

Other major market benchmark indexes are only a few good retail-led rallying days from making new highs too.

What’s worrying professional investors and traders is how much the spectacular rally everyone’s enjoying is reminiscent of the 1990s.

The truth is there’s good reason to be worried.

Irrational Exuberance Manifesting

New retail investors haven’t been tested since the March lows. Last Thursday’s big selloff, when the Dow dropped 6.9%, was their first blush with a big drop, though the Nasdaq Composite didn’t fall nearly as hard.

A day after the tumble retail investors were back buying the dip on Friday.

And on Monday, after markets opened down on news of new coronavirus hot spots cropping up around the U.S. and the world, optimistic investors again saved the day and drove markets higher into the close.

But irrational exuberance is starting to manifest itself.

Three weeks ago, The Hertz Corporation declared bankruptcy on a Friday. The following Monday retail investors chased the bankrupt company’s technically worthless stock higher.

Last week they bid Hertz stock up from $2 to more than $6. Hertz is bankrupt, mind you.

That means creditors will likely try and salvage what the company owes them by exchanging their debt for new stock, taking control of the company and wiping out existing shareholders.

At least that’s what usually happens in a Chapter 11 bankruptcy.

However, in the sign of the times, the times of irrational exuberance that is, investment bank Jeffries Group thinks retail investors want Hertz’s stock so much they might be willing to buy another $500 million or $1 billion worth of it, if Jeffries sells it to them.

The target is of course those retail investors who think Hertz stock is worth something. It isn’t.

Or maybe it is.

In what would be a watershed event, if Jefferies can sell $500 million of old Hertz stock to new buyers, the company just might raise enough money to help it emerge from bankruptcy without going through the usual channels that wipes out old stockholders.

It’s never been done before and it may not work.

Retail investors who buy more Hertz old stock could get stuck holding a very worthless and empty bag.

Or they could change the future of bankruptcy finance.

Yes, it’s crazy and irrational, but it might work.

And retail might not ever flinch if markets swoon.

They might buy more dips, maybe all of them, forever.

That’s the way it looks, at least for now.

Of course, there’s no guarantee a string of ugly down days won’t shake retail investors’ and trader’s confidence and trigger waves of selling.

That’s what happened in the tech wreck.

While the jury’s out this time on whether history repeats itself or whether retail investors are the new professionals, it makes sense to ride the new bull market until it turns tail on itself.

Until then,

Shah Gilani