the news

There have been numerous reports in the financial press over the past month or so that, after two+ years on the sidelines, retail investors are beginning to return to the stock market.  The latest of these appeared in the Financial Times yesterday.  The FT article is a bit selective.  It points out that Charles Schwab added $26.2 billion in new assets in the December quarter, the largest amount in one quarter for the past two years.  It reports that competitor TD Ameritrade added $9.7 billion to its books for the period, but doesn’t mention that this is about average for the firm over the past year and that it added more than $10 billion to its books in the June 2010 quarter.

The latest ICI figures–the Investment Company Institute, the money management trade association, which seem to have been a lagging indicator, are finally starting to confirm the trend that newspapers have been reporting.  The weekly figures for January 12th show $3.78 billion flowing into domestic-oriented equity funds, continuing flows into international/global stock funds, and moderation in the (still positive) flow of money into taxable bond funds.

One significant point is beginning to emerge.  According to the FT, the money flows to the discount brokers are primarily day traders, not buy-and-hold investors.  This latter, much larger, group remains firmly in the highly defensive posture it adopted over two years ago.  The speculative orientation of the recent assets opening brokerage accounts is confirmed by TD Ameritrade’s comment that the use of margin loans by its clients is up 31% year over year.

consequences

The new inflow of retail money likely gives Wall Street a further gentle upward bias.

The fact that there is still considerable private investor money on the sidelines suggests there is more positive news to come on funds flow front.  In other words, the new money doesn’t appear to be a harbinger of the end of the bull market.

The day trader character of the new money suggests that short-term volatility in the market will increase.  To the extent that day traders concentrate on mid- and small-cap names, the volatility in this area should be most affected.  For a long-term investor, this is good news, since it means better buying and selling opportunities for anyone willing to exercise patience.

The use of margin suggests inevitable corrections in the market will be swifter and deeper than they would be otherwise, as high leverage works against traders.