Robinhood Millennials Catch the Consensus by Surprise

June 2, 2020

There is a loud chorus calling for a re-test of the recent lows around 2,200 based on the empirical fact that almost every major market sell-off of more than 20% has a retest of the lows, but that looks a bit complacent and as the old saying goes, in markets “the obvious rarely happens, and the unexpected constantly occurs.” – Market Update, 24 March 2020

Since the market lows of March world governments and central banks pulled together and successfully avoided having a health and economic crisis also become a financial crisis by pumping nearly $10 trillion in liquidity. Much to the disbelief of most market participants, equities have staged a steady recovery with the S&P 500 returning nearly 13% in April followed by a 4.5% return in May. The reality is that while most were too busy gawking at how much worse things could get, the massive injection of liquidity into markets was busy utterly overwhelming economic and financial fundamentals, with the Fed clearly leading the way.

Between the Fed’s intervention and extremely loose fiscal policy enacted via more generous unemployment protection and stimulus checks deposited direction into Americans’ bank accounts, financial conditions promptly recovered. Surely enough, the combination of underemployment, lockdowns, spare cash and the Internet 2.0, beckoned Millennials to download the Robinhood apps and participate in financial markets. Indeed, the S&P 500’s nearly 20% run up from the March lows has been mostly enjoyed by retail investors, with institutions largely staying on the sidelines, in what has become the latest humbling of the market consensus. Notably, the lion’s share of the returns accrued to tech names as well as other brands with which Millennials are most familiar.
As of now, institutional investors remain largely underinvested, but with the S&P 500 now back above its 200-day moving average and the VIX curve back in contango, they are likely, along with trend-following quant funds, to be pushed back into long positions. Between the possibility of a second pandemic wave and a precarious political situation from the US to China, there is plenty that can upset the apple cart, but given multi-year high spec shorts in equities, a low volatility melt-up remains the more likely scenario.

S&P 500 speculative short positioning at multi-year highs

Indeed, the desire for a return to normalcy is palpable and sure enough the economy has been slowly recovering, with air travel, restaurant reservation and hotel occupancy showing signs of modest improvement. Amid a mandate for construction to be labeled an essential service, housing has been a remarkably strong performing sector of the economy. However, and perhaps more notably, in yet another example of unforeseen circumstances, gasoline consumption has strongly recovered and driving rates are now above pre-pandemic levels as most people remain apprehensive of using mass transit and opt to use private transportation.

Sure enough this, along with relentless shale capacity destruction has pushed crude oil prices back to the mid 30’s on convincing price action. While the rate of decline in shale oil rigs has eased, the full impact will take a while to feed back into oil prices, but bar another large-scale shutdown, we are unlikely to see extreme oil price volatility in the coming months.