On Tuesday in Forecasts & Trends, I attempted to answer the growing question of how it is that stocks have rallied very strongly since the gut-wrenching 35% plunge in March. I argued that the biggest reason is the unprecedented actions by the Federal Reserve which cut interest rates to near zero and purchased several trillion dollars’ worth of Treasury and mortgage-backed securities to keep the financial markets liquid. I stand by that analysis.
However, there is another theory about why stocks have rebounded so sharply despite the coronavirus crisis and the historic economic lockdown. Before I unveil this theory, let me warn you it may sound bizarre. But as you will read below, there is growing evidence to support it.
Let me begin by asking you a simple question. What do you think the millions of sports gamblers and professional bettors have been doing with their money since college and professional sports were shut down in March? Stop and think about that for a moment. What else could they do with their money to make a buck?
There is growing evidence that many of these professional gamblers have moved heavily into the US stock markets, which for now are about the only speculative game in town. A growing number of market analysts are concluding that, in fact, it is these professional gamblers who are helping lift stock prices higher, even more so than the Fed. Let’s look at the evidence.
Many professional stock market traders and millions of retail investors have largely abandoned the equity markets amid the coronavirus pandemic and the plunge of nearly 35% in March. Nearly $5 trillion now sits in money market funds (effectively savings accounts), the largest total on record and about $1 trillion more than the record high during the global financial crisis of 2008.
So, it’s definitely not professional traders and retail investors who have been driving stock prices sharply higher since March. While there is no doubt the Fed has taken actions that help to boost equity prices, there are reasons to believe sports bettors and other professional gamblers are playing a big role in pushing stock prices higher.
While professional and retail stock investors have largely abandoned the market amid the coronavirus pandemic, professional gamblers and bored Millennials have jumped into the retail stock trading market with both feet recently.
Online brokerage firms have seen a record number of new accounts opened this year, especially since February when the COVID-19 virus surfaced. E-Trade, TD Ameritrade, Charles Schwab and Interactive Brokers executed as many trades in March and April alone as in the whole first half of last year, per their public disclosures. That’s huge!
Robinhood, an increasingly popular online stock trading brokerage (which offers extremely low or even zero commissions) has gained serious traction in bringing online day-trading to the masses. It boasts a similar increase in new accounts over the last few months and says many of its new customers are former sports bettors. Are you seeing a pattern here?
Robinhood estimates that some 43% of men aged 25-34 who watch sports regularly also bet on sports at least once per week. Wow, I had no idea. And the numbers get even higher among older men up to a certain age.
So maybe we should not be surprised to learn that more and more sports gamblers and Millennials are now turning to stocks as the only game in town. And it may well be that their growing interest in speculating in stocks is contributing in a big way to the recent strong rally in equity prices.
In some ways, sports betting and stock trading aren’t all that different. In fact, most online betting platforms are modeled on stock exchanges, something I never knew before researching this topic. The comparisons between the two have only increased with the rise of legal sports betting and the surge in mobile stock trading — two activities that cater to the thrill of short-term gains and losses.
At the end of the day, I don’t think it’s possible to conclude whether the Fed has been the most positive influence on stocks prices since the coronavirus outbreak, or whether it has been the growing influence of former sports gamblers and other professional wagerers. But I do believe we can agree that both have had a major impact on bringing the stock markets back from the abyss we faced in March when the market plunged nearly 35% in just five weeks.
I thought this topic was very interesting. I hope you did, too.
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