The Economist: Dip buyers to the rescue - the retail army holding up the market

Key topicsRetail investors drove a rebound after Trump's surprise tariff moves"Buy the dip" behavior now stabilises markets during sharp sell-offsApp-based trading and wealthy investors help reduce market volatility.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist .Stockmarkets appear to have recovered their poise. By May 2nd America’s S&P 500 index had climbed back to its level of a month earlier, just before President Donald Trump’s “Liberation Day” tariff salvo. If the S&P’s plunge was shocking—a fall of 12% in just four trading days—the rebound was, too. Mr Trump’s decision to pause many of his duties certainly helped. So, it seems, did retail investors. Even as markets dropped by 5% on the day after Mr Trump’s announcement, retail investors refused to pull out their money. Instead, they poured in a net $5bn. Over the next week, as prices slid still further, they deployed additional billions, snapping up everything from tech giants such as Amazon and Nvidia to exchange-traded funds tracking the whole market. If retail investors were fazed by Mr Trump’s tariffs, they had a funny way of showing it..In decades gone by, such investors were often derided as bandwagon-jumpers who extrapolated future trends from past performance. Today they are contrarians. Amateur investors regularly pile into the market on its most difficult days. Investing forums, notably Reddit’s r/WallStreetBets, throb to a drumbeat of encouragement for participants to “buy the dip”. Whereas institutional investors may be forced by risk managers to unwind trades when prices slide, retail investors provide welcome liquidity during sell-offs—a pattern that is changing modern stockmarkets. The “momentum” stereotype was not without foundation. In 2014 Robin Greenwood and Andrei Shleifer, both of Harvard University, found that falling stock prices did not prompt investors to expect higher returns—as theory would suggest they should—but lower ones. Indeed, flows into mutual funds still track broader market sentiment, and money heads to the best-performing managers. The logic that what rose yesterday will surely rise tomorrow remains powerful: witness appetite in recent years for bitcoin, GameStop and Cathie Wood’s tech-heavy ARK fund..At the same time, there have long been forces pulling in the opposite direction. First among them is rebalancing. Many savers aim for a 60-40 mixture of, for example, $600 in equities, $400 in Treasuries. A slide of 20% in stocks and a bond gain of 2% leaves equities at $480 and bonds at $408, a 54-46 split. Restoring the 60-40 divide means buying the asset that has just fallen. Psychology plays a similar balancing role: one of the most widely documented biases is the “disposition effect”, whereby investors sell winners and hold losers. A reluctance to realise losses may appear as contrarian behaviour..Read more:. Investor anxiety surges as S&P 500 stumbles: Hedging strategies on the rise.These effects are not sufficient to explain recent rallies, however. The disposition effect concerns selling, not scooping up bargains, and rebalancing is usually a quarterly or annual ritual. Neither much reflects sentiment, let alone the Reddit drumbeat. Instead, retail investors appear to have developed a self-fulfilling belief that there will almost always be a snap-back. This is not entirely unwise. According to theory, when prices plunge, either fundamentals have worsened or investors have become more skittish; in the latter case, those with cash to spare should pocket a premium for providing liquidity and shouldering the risk. Moreover, empirical evidence suggests the theory does hold over long investment horizons.Main Street betsTiming may offer a clue as to how to reconcile the data of Messrs Greenwood and Shleifer with investor behaviour during the stockmarket plunge that followed Mr Trump’s tariffs. A “buy the dip” approach is frequently invoked to justify splurging on assets that have fallen in price in recent days or weeks, whereas evidence on surveys and mutual-fund flows tends to capture behaviour in response to performance over months or years. And there may now be more short-term traders than in the past, owing to the explosion of app-based, instant-trading platforms, including EToro and Robinhood. In 2019 the latter had $14bn of assets under custody; that figure has since climbed to $180bn. Robinhood’s average client is around 15 years younger than that of Vanguard, which provides staid index investing. Growing numbers of ultra-rich investors may also play a role. Although there are still relatively few in total, they account for a larger share of “household” flows—and are eager to provide liquidity when the market drops. According to Xavier Gabaix of Harvard and co-authors, affluent investors with less than $30m typically take money out of stocks when markets fall. Those with over $30m step in. Paradoxically, therefore, the ultimate consequence of concentrated wealth, internet mania and contrarian, app-based trading may be a calmer day-to-day market. Bullish retail sentiment may inflate valuations over the long haul, but without billions of dollars of inflows to stabilise the market in April, stocks would surely have fallen further amid even greater volatility. Dip-buyers were stabilisers. With stocks having recovered they also look—for the moment, at least—like sages.

The Economist: Dip buyers to the rescue - the retail army holding up the market

Key topics

From The Economist, published under licence. The original article can be found on www.economist.com

© 2025 The Economist Newspaper Limited. All rights reserved.

The Economist

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