Retail Investors Rewrite the Rules, Leaving Wall Street Perplexed.
"Don't bet against them," warns strategist Mark Hackett, as the 'buy the dip' crowd consistently defies traditional market logic and confounds institutional players.
In a market tug-of-war that has intensified this week, everyday retail investors are proving to be a formidable force, consistently upending the strategies of seasoned institutional players. According to Mark Hackett, Nationwide Investment Management Group’s chief market strategist, this new dynamic has left Wall Street baffled, and he advises against underestimating the power of this cohort for the time being.
The recent market volatility serves as a prime example of this ongoing battle. A selloff on Friday, driven by what Hackett described as a “typical response” from institutional investors to negative jobs data and tariff news, was almost entirely reversed on Monday. “To me, that is retail investors having been trained into this concept of buying a dip and it’s confusing institutional investors completely at this point,” Hackett stated in an interview with MarketWatch.
This trend of aggressively buying into market weakness is not just an observation; it’s backed by data. Retail brokerage Interactive Brokers reported that its cumulative net stock buy orders surged by 78% on Friday compared to the previous week, coinciding with the S&P 500’s fourth consecutive day of losses. This behavior demonstrates that retail traders are not waiting for confirmation to re-enter the market.
This pattern marks a significant departure from pre-pandemic norms. “If you look back in history…Friday would have led to a more consistent downturn,” Hackett explained. He noted that factors like high market valuations and weak seasonal trends in August and September would typically signal a period of consolidation. However, these “historical trends are no longer working,” forcing institutional investors into a cautious stance, fearful of betting against the market while the retail army remains on the offense.
The rise of the retail investor has been fueled by an enhanced toolkit, including greater access to options, lower technological barriers, and what LPL Financial’s Thomas Shipp described as a “sensitivity to momentum, a focus on thematics, and an insensitivity to high valuations.”
Despite their current success, Hackett offers a word of caution to the retail crowd. With markets facing high valuations and swirling economic uncertainty, he advises that “now wouldn’t be the time where I would be aggressively shifting my portfolio to risk on.” He points to the spring of 2022 as the last time this strategy faltered during a sustained period of weakness following Russia’s invasion of Ukraine.
Meanwhile, institutional investors find themselves in a “terrifying place,” Hackett says. Many were conservatively positioned earlier in the year and are now chasing a market heavily influenced by a few major technology stocks, making diversification a significant challenge.
Looking ahead, Hackett anticipates that markets might consolidate through September before potential tailwinds from government spending could fuel a year-end rally. The bottom line, according to Hackett, is that while the retail investor’s power isn’t infinite, for now, “you don’t bet against the retail investor.”
