Market Extra: Yes, retail investors are back, but they only have eyes for Tesla and AI right now.


While data shows individual investors dusting themselves off and moving back into the stock market this year, alas their love for Wall Street is uneven.

That’s according to Vanda Research, which points out that while retail investor inflows into U.S. stocks are at levels last seen in 2020-21, the move has has been dominated by Tesla Inc. TSLA, +3.00%, whose shares saw their worst-ever performance in 2022, and stocks exposed to a hot new technology.

“Tesla shares are experiencing an unprecedented surge in demand, and to a lesser extent, so are artificial intelligence-related stocks like NVDA and AI, as well as the rest of FAANG group,” said Marco Iachini, senior vice president, Giacomo Pierantoni, head of data and Lucas Mantle, data science analyst, in a Thursday note, using ticker symbols for Nvidia Corp. NVDA, +0.59% and Inc. AI, -14.13%.

Read: These 20 AI stocks are expected by analysts to rise up to 85% over the next year

“If flows into cash equities sustain the current pace, we believe there is scope for the more speculative retail traders to pick up the slack in the options market too — where activity has been muted over the last year,” said the team in a note to clients.

Vanda Resarch

That said, the analysts see fear of missing out (FOMO) and momentum driving flows, making the situation different from early 2021 and leaving individual investors “susceptible to negative catalysts.”

“That said, should macro conditions remain favorable in the near term, we do not exclude a continuation of speculative activity in AI-related stocks or other niches of the market,” said the Vanda Research team.

Major stock indexes have bounced strongly to begin 2023, with the tech-heavy Nasdaq Composite COMP, -1.02% up nearly 15%, while the S&P 500 SPX, -0.88% has bounced 8% and the Dow Jones Industrial Average DJIA, -0.73% has gained 3.2%.

JPMorgan reported last month that retail market orders as a percent of market value reached 23% on Jan. 23, which compares the 22% seen a few times back when GameStop shares GME, -6.78% started soaring and Roaring Kitty and Reddit Wall Street Bets was the talk of the watercooler in early 2021.

Markets are also seeing a rebound in total trading turnover, versus the second half of last year when stable daily net buying was accompanied by declining trading volume as investors focused on disciplined longer-term buying. The bounceback suggests improved risk appetite and “option volumes could pick up next, albeit not to the same extent, given that a large share of the WSB/degen crowd is likely still licking their wounds from 2022,” said the Vanda team, referring to the popular wallstreetbets Reddit forum.

In order to see trading expand beyond Tesla and AI stocks, they said the market needed to see continued U.S. economic resilience and particpation by “fast money discretionary managers,” along with more buying by mutual funds and pensions.

In the meantime, hopes for a soft landing and not-too-hot, not-too-cold economy is likely to keep the money flowing. That lines up with insights from JPMorgan, who noted significant participation lately by older investors, who will likely keep buying stocks and bonds unless optimism over inflation fades.

According to JPMorgan, older investors, who tend to invest via exchange traded funds, have injected $81 billion into bond funds and $44 billion into equity funds so far in 2023, against last year when they sold “unprecedented $340 bilion of bond funds and bought no equity funds,” said strategists led by Nikolaos Panigirtzoglou.

As for Tesla flows, Vanda Research noted that in the latest week, the EV maker drew a 24% and 33% share of single stock and overall net purchases across all U.S. securities, respectively. While they see investors “chasing momentum in the stock aiming to recoup 2022 losses,” the gains also come as hopes build ahead of Tesla’s March 1 investor day.

Vanda Research

As for AI (artificial intelligence) related stocks, in a week that has delivered news on chatbots from Alphabet’s Google GOOGL, -4.39%, Microsoft MSFT, -1.17% and Baidu BIDU, -2.80%, the Vanda team noted large retail net inflows over the last few days continued to flow into, though that has begun to slow some. Retail investors are also sticking money into related small-cap stocks, such as BBAI, -11.21% or SoundHound AI SOUN, -13.61%.

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And Nvidia NVDA, +0.59% and Microsoft could be next to draw the big investor interest. “Should TSLA’s stock price continue its rapid ascend, leading retail traders to lock in profits or avoid adding further exposure, we expect demand to turn to NVDA and MSFT as alternative investment options,” said the Vanda team.

Vanda Research

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