America's New Retail Army：Millennials

A new investment paradigm is reshaping the stock market, driven at its core by a group of young retail investors who "buy the dip" at every opportunity. With their steadfast conviction to purchase when the market declines, they have provided unexpected support to the market.

The latest market dynamics confirm this trend. In early August this year, the market briefly fell due to disappointing employment data, but quickly recovered its losses. A more striking example occurred in April: according to data from JPMorgan, after April 1, the S&P 500 Index fell about 5% over two consecutive trading days, yet retail investors poured into the market at record levels during this period.

Data shows that this buying power is massive. According to EPFR, in the week ending April 9, U.S. stocks and mutual funds recorded a net inflow of $31 billion, cushioning the market's sharp fluctuations. For many seasoned Wall Street professionals, this behavior is another sign of market overheating, especially with large-cap tech stocks trading at historically high valuations.

However, the resilience of retail investors may be more than just fleeting optimism. Their willingness to stay in the market may last longer than many market veterans expect, which in turn could help ease the eventual mean reversion process of highly valued stocks, providing the market with an unprecedented "cushion."

A New Generation Rewriting Market Logic

This generation of investors is fundamentally different from their predecessors. Few of them remember the bursting of the dot-com bubble or the painful experience of the financial crisis. Instead, the current crop of young investors has mainly experienced bull markets since opening their accounts. Early investment successes have made them more willing to take risks and encouraged them to hold on during turbulent times.

In 2022, when the Federal Reserve raised interest rates, the S&P 500 Index fell 19%, its biggest drop since 2008, putting retail investors' "buy the dip" tendency to the test. But many chose to stay the course. According to EPFR data, U.S. equity mutual funds and ETFs still recorded $27 billion in net inflows that year. They were soon rewarded. After this decline, the S&P 500 saw its best two-year performance in 25 years.

By contrast, the older generation of investors has a very different memory. EPFR data shows that during the 2008 financial crisis, investors pulled nearly $50 billion out of U.S. equity funds, and even after the market bottomed in March 2009, outflows continued for four more years, causing them to miss the start of the longest bull market in U.S. history.

The Wealth Effect And Social Change

Nowadays, stocks are more intertwined with the financial well-being of the American public than ever before. Ed Clissold, Chief U.S. Strategist at Ned Davis Research, pointed out that in the first quarter of this year, the share of equities in household financial assets surged to 36%, the highest level since records began in the 1950s.

The sustained rise in the stock market has brought a significant wealth effect. By the end of 2024, the number of 401(k) millionaires at Fidelity reached a record 537,000. Veteran market observer and former Leuthold Group Chief Investment Strategist Jim Paulsen said, "It emboldens people because they've been successful. You kind of start feeling like, 'This is the deal, I can stomach pullbacks."

Meanwhile, broader social changes are also fueling this trend. Trading and gambling have, in the eyes of many Americans, evolved into forms of entertainment. Technological advances have made trading all kinds of assets more convenient and cheaper than ever before, with some brokers even gamifying their apps to create a casino-like atmosphere. This environment keeps retail investors highly engaged.

The Growing Influence of Retail Investors

This group of retail investors has become a force that cannot be ignored in the market. According to JPMorgan, retail trading recently accounted for around 20% of total options activity, even exceeding the peak during the 2021 "meme stock mania."

In the stock market, their influence is equally significant. Data from brokerage Jefferies shows that retail investors account for about one-fifth of total equity trading volume, slightly below the 2021 peak but double the 2010 level. This scale means their collective actions are substantial enough to impact market trends.

Of course, every bull market eventually ends. When the turning point comes, higher valuations mean sharper declines. Wall Street professionals generally view retail enthusiasm as a sign of a market bubble and are concerned about current valuation levels.

However, if investor psychology has indeed undergone a structural shift, the market may possess an underestimated cushion. This new generation of bullish investors could play the role of past short-covering forces during downturns, buying when others are selling, thereby limiting the magnitude of declines. A client survey by Charles Schwab supports this view, with about 80% of respondents saying they plan to buy on dips if market volatility occurs in the coming months.