Investors' Risk Appetite Is at an All-Time High. That Could Be a Problem
Two months. That’s how long the pandemic-triggered recession lasted, from February to April 2020, making it the shortest economic downturn in U.S. history, according to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee.
For those scratching their heads, the NBER makes clear that this does not mean the economy “has returned to operating at normal capacity,” only that the expansion got off to a (very) slow start soon after the whole world came to a screeching halt in early 2020.
Indeed, the shockwaves of those two months are still being felt: Initial jobless claims remain at elevated levels. Commercial air travel, especially business travel, hasn’t quite fully recovered, though it’s showing signs of improvement.
And then there’s unprecedented government spending and money-printing, which continue to this day. Due mainly to stimulus measures, the U.S. deficit is expected to hit $3 trillion this year; meanwhile, total assets held by the Federal Reserve are on their way to $9 trillion.
A lot of this money has flowed into stocks and other risk assets. According to Morningstar, mutual funds and ETFs saw net inflows of $722 billion in the first six months of the year, the largest semiannual amount going back to 1993. As of the end of 2020, a record $5.4 trillion sat in funds that passively track the S&P 500, Axios reports.
Take a look at the chart below. Investors’ appetite for risk is at an all-time high. Stocks as a percent of households’ financial assets are above 40% for the first time ever. What’s more, Americans are trading on margin like never before. At the end of June, margin accounts totaled an unheard-of $882 billion, up 50% from just a year earlier.
A big part of this story is who is doing the investing. Thanks in large part to $1,200 stimmy checks, there’s been an explosion in the number of retail investors. Ahead of its initial public offering (IPO), Robinhood reports that it now has as many as 18 million users, up almost double from 2019.