Is the "everything rises" scenario replaying in the US market? Retail investors trading fever is back?

The US stock market and cryptocurrencies have soared to historic highs, while meme stocks are also on the rise: the S&P 500 index hit a new high, Bitcoin also reached a historic high of $68,000, and the stock price of GameStop (GME.US) rebounded to $60; even Donald Trump's unprofitable social media company saw its stock price soar after going public. This scenario is reminiscent of the financial asset boom of "everything rebounding" in the fall of 2021, but those who predicted that retail trading would return to an exciting heyday may have been a bit hasty, as researchers are already questioning how long the stock market's five-month rally can last.

Furthermore, analysts and investors say that the way people trade in 2024 and the economic environment in which they trade have changed. There is now a view that in this new era of adventure, retail traders are more seasoned, less emotional, and more strategic.

"Retail Traders 2.0"

Since 2021, retail investors have been paying attention to the parent company of Truth Social, when Trump Media & Technology Group and Digital World Acquisition Corp., a special purpose acquisition company, announced their merger plans. With the highly anticipated deal completed on Monday, Trump's fame and bullish sentiment in the stock market drove the stock price of the new merged company higher. After a significant increase for three consecutive days, the stock fell 6.4% on Thursday.

Some posts on Reddit seem to reveal the role of so-called "dumb money" here. Whether it's the criminal cases facing the former US president, the massive fines looming over New York, or the weak fundamentals of the company, supporters of the Trump presidential candidate and everyday investors are pouring money into the company. But traders know that this could be a tumultuous journey. Retail investors have experienced the skyrocketing and plummeting of many meme stocks before, wanting to enter and exit quickly.

Sam Nofzinger, general manager of brokerage at investment platform Public, said: "We've moved past the point where retail investors don't know what they're doing. They are the second version of retail investors, just a bit more seasoned."

Focus on "Fear of Missing Out (FOMO)"

One of the changes analysts see in the field of retail investors is the shift from returns to risks. With rising interest rates, investors are concerned about increasing geopolitical risks and the possibility of an economic recession, causing all assets that peaked in 2021 to slump in 2022. In this environment, the rise in bond yields dampened retail interest in high-risk assets. Americans bought billions of dollars in savings bonds and even ventured into corporate bonds.

But things changed last year. While analysts had been predicting it, the US economic recession never arrived. With the market rising, retail investors began to realize they needed to return to the stock market. Nofzinger said: "They finally gave in. They said, 'You know what? The economic recession isn't coming. Stocks are going up. Why do I need cash? Let me go buy some AI stocks, some of these growth stories, and then try to invest." This does not mean that a widespread meme stock frenzy is imminent. Instead, experts see a more concentrated Fear of Missing Out (FOMO) sentiment centered around artificial intelligence. Trump's company is not an artificial intelligence story, but it is benefiting from the current tech boom in the market. Furthermore, the recently listed retail investor forum Reddit (RDDT.US) positions itself as having the potential to train large language models needed for artificial intelligence. Day traders are also rushing to buy shares of artificial intelligence company NVIDIA (NVDA.US) like they did in the past with Tesla (TSLA.US). Susannah Streeter, Funds and Markets Analyst at investment platform Hargreaves Lansdown, stated: "The FOMO effect is still strong, but it has a different driving force, which is artificial intelligence."

However, she pointed out that there may be "excessive enthusiasm" in the market, and the precise trajectory of artificial intelligence is difficult to map out. Researchers at JP Morgan share the same view, expressing concerns about the influx of so many investors into the stock market recently. If large investors start rebalancing their positions, a sharp correction in the market could quickly follow. One of the stocks that drove the 2021 frenzy, Reddit, has also experienced fluctuations.

Nevertheless, Ben Laidler, Global Market Strategist at eToro, believes that meme stocks will not see a large-scale resurgence like in 2021, partly due to the recent end of the crypto winter, with retail investors shifting towards crypto assets. With institutional funds buying Bitcoin for their recently launched ETFs, and plans for halving aimed at limiting the issuance of cryptocurrencies, Laidler views the recent rebound as more of a "supply-demand squeeze" rather than a pure result of retail speculation. Laidler stated: "I don't think the old meme stocks will come back. Retail investors have basically moved on and returned to the cryptocurrency space."