When one of my sons showed me his Robinhood account several months ago, I was in awe.
Not because of the performance, but because this endeavor had escaped the confines of his professional-investor parent (me) and because the mobile phone app was so attractive that I wanted to start trading on it, too.
Recently, I asked how the account was doing, and he explained that he had sold his positions to pay for some renovations at his new apartment.
I began thinking about how frequently these new stock owners will be selling their equities to spend on what has been unavailable for almost a year now — travel, hotels, concerts, restaurants, and Covid-prohibited experiences.
Is my son typical or an aberration among the millions of new account holders across multiple platforms?
We know that the savings rate skyrocketed in 2020, hitting an amazing peak of nearly 34% in April, which compares to a typical level of 7.5% of income.
Investments, one component of "savings," began to climb, especially after the rally persisted for several months.
As interest rates submerged to bolster the economy, bonds and money market funds offered little enticement to individuals, and stocks became one of the best speed-dating, fantasy sports-fulfilling, and online betting adrenaline shots of 2020.
When the millions of Americans, who have opened new brokerage accounts, are able to hit the Champs-Élysées, baseball stadiums, and Coachella, will they sell stocks to pay for the tickets?
We know that savings soared 173% in 2020 over 2019, to $1.56 trillion, a combination of $1 trillion in higher disposable income and $563 billion in reduced household spending.
Will they start selling?
However, because we have no experience with pandemics in our lifetime, and very limited encounters with curtailed spending, we have little information to analyze on the topic.
If we assume that the savings rate will return from the current 13% toward the trendline of 7% to 8%, it is worth looking into whether changes in that factor appear to impact stock returns.
The table below, using 50 years of data, indicates almost no correlation.
Quarterly S&P 500 Returns vs Quarterly Savings Rate (1970-2020)
| S&P 500 Average Quarterly Return | Savings Rate |
|---|---|
| 2.98% | >11% |
| 2.9% | 9%-11% |
| 3.64% | 7%-9% |
| 3.2% | 5%-7% |
| 0.73% | <5% |
Source: St. Louis Federal Reserve, FactSet
In addition, if the incremental 6% of income, saved recently over the average rate, is spent by individuals when options are available, this would likely not eat into last year's investment accounts.
The exceptions would include a few categories, such as individuals who sell equity holdings for major projects, purchases, or expensive trips.
These investors would liquidate equity holdings if the cost of these expenditures exceeds the combination of savings from current income and non-stock, or "defensive," savings — checking, savings, fixed income — from their past earnings.
Historically, investment accounts are very sticky. However, the modern model has changed dramatically.
The average brokerage account on Robinhood, which is around $1,500, is considerably smaller than in the past. Further, the low cost to open an account, trade and close a relationship encourages more transactions, including termination.
Even a low-tech-aptitude type, like me, only needed three minutes to complete everything essential to open a new trading account.
A slew of concurrent selling from large numbers of small accounts could possibly trigger downward pressure on shares of the most popular stocks on mobile trading apps such as Snowflake, Moderna, and Zoom, but most have significant market capitalizations.
As I have written in previous articles, it makes sense to be wary of extremely high valuations of popular tech names that the retail traders have embraced.
Another reason why retail investors — who may contribute 30% of the average daily volume — might sell stock would be an increase in the cost of living.
Should inflation accelerate, a condition few economists believe is likely over the next year, people may need to deploy savings to maintain their lifestyle.
Finally, there is the ultimate incentive for most people to sell stocks; the market corrects. Time and again, investors make the same mistake, which is to buy when the market is very high and sell near the bottom.
Until that happens, it is likely that most of the millions of new retail market participants will stay in the market, even if they trade, commission free, every day.