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What Keeps the US Stock Market Up?

July 22, 2020 By Mircea Vasiu

The US stock market remains stuck at the highs. While some indices already made new all-time highs for the year (e.g., Nasdaq 100), the other ones are in the close vicinity of doing the same, or at least to turn positive for the year (Dow Jones, S&P500).

Who is buying stocks in a pandemic, and why investors take the risk of owning companies at sky-high valuations? This article looks at some explanations.

Retail Traders Keep Discovering the Stock Market

Fractional share investing is a recent “innovation” that allows traders to invest any amount in the shares of a company, regardless if the price of a share exceeds the amount to be invested. The broker simply transforms the amount into fractions of a share.

The innovation brought new traders to the big companies – traders that opened new accounts. On July 16th, Charles Schwab, a reputable broker in the United States, reported a massive increase in the number of retail accounts.

Seen in blue in the above chart, it shows that in Q2 2020 the broker added more new accounts than the previous six quarters combined! Moreover, it is not only about the number of accounts, but the number of active traders as well – 1.6 million day trading accounts exist at Schwab, a staggering 400% increase since the end of 2019.

Foreigners Are Piling In

Only last May, foreigners bought $80 billion worth of US stocks, a staggering amount considering that in the last decade, any twelve-month interval did not show such data – $157 billion pouring into US equities in the last 12-months ending in May 2020.

Tech Dominates the Market

The big tech companies reveal an incredible flow towards the leading Nasdaq names (e.g., Microsoft, Amazon, Apple, Alphabet). Other sectors literally sit near-zero levels, showing a market-driven by extreme investor preference. Technology is eating the world.

The three reasons presented here explain much of the flows pouring in the US stock market after the COVID-19 pandemic outbreak. As long as work-from-home remains elevated, households receive help from governments, and unemployment benefits or grants keep coming, people are likely to increase their exposure to the stock market.

That is especially true for the young generation of traders that barely discovered the stock market. So far, they discovered the benefits of investing. But in the long run, no investor is spared from periods of sharp capital shrinking.