This is similar to what Vanguard went through in 2016-2017 during the index fund boom, which catapulted the firm’s assets under management to more than $5 trillion. That period was very disconcerting to so-called active money managers. There was a lot of debate, not always polite, over whether indexing was a form of market socialism, making it impossible for anyone to “beat” the broad indexes. At the time, I sided with the active managers, believing that the index craze was a malignant influence on the markets. But I would trade that for today’s retail stock-trading frenzy anytime. Back then, investors were conditioned to buy and hold. Now, it’s all just unproductive speculation.
The question is whether this is a permanently high plateau of retail trading activity, or will a bear market cause all these new investors to become frustrated and give up trading stocks? I think we know the answer. But for the time being, retail trading makes up a larger and larger percentage of market volume, and retail brokerages are seeking to exploit the opportunity and expand capacity. TD Ameritrade’s Investor Movement Index -- a measure that has tracked clients’ positioning in the market since 2010 -- rose to the highest level on record in June, according to Bloomberg News. As for a bear market, there does not seem to be one on the horizon, with the Federal Reserve continuing to pump massive amounts of liquidity into the economy.
From a competitive standpoint, Fidelity may lack the “cool” factor and “gamification” that Robinhood Markets Inc. provides, but it is still doing a decent job at convincing younger investors to open accounts. It opened 700,000 new accounts for investors age 35 and younger during the second quarter. The conventional wisdom around these sorts of accounts with small balances used to be that they were unprofitable and less desirable, but now the retail brokerages seem to be willing to do a lot of unprofitable business in the hopes that small accounts one day become large accounts. That is more likely to happen at a place like Fidelity, that has a full suite of customer offerings. Robinhood is purely for speculation, and not for accumulating assets.
Fidelity shouldn’t try to compete with the likes of Robinhood, and an effective marketing strategy would be to characterize Robinhood as unserious -- the type of place where you day-trade “meme” stocks like GameStop Corp. and joke cryptocurrencies like Dogecoin. In the event that the stock market does enter a protracted bear market sometime soon, Fidelity will be much better-positioned to handle it as a diversified financial company than Robinhood, which relies almost entirely on speculative trading activity. The parallels with 1999 are impossible to miss. All the day traders of the dot-com bubble eventually gave up and went back to their day job. It took them 20 years to return.
This is one of those time-tested sentiment indicators in markets. Fidelity is perhaps the first firm to announce a dramatic increase in headcount, but probably won’t be the last. Wait for the banks to follow suit, and then you know the top will be in. There is no such thing as a permanently high plateau.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of “Street Freak” and “All the Evil of This World.” He may have a stake in the areas he writes about.
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