Chapter 1: The Impact of COVID-19 on Retail Investment

The COVID-19 pandemic has stirred a whirlwind of emotions in both our lives and the stock market. A timeless illustration of the contrasting feelings of greed and fear serves as a reminder of the stock market's volatility. Instead of forecasting future trends based on our biases and emotions, let’s analyze what has already transpired.

Before the pandemic, individual net flows had only exceeded the $10 billion mark once. However, since COVID-19 emerged, these net flows have remained above that threshold for an astounding 27 out of 28 months. Notably, March 2022 marked an all-time high with net flows reaching $28.17 billion.

Understanding the complexities of human psychology is crucial; simply presenting facts does not guarantee profitability in the market. It’s essential to contextualize the current market landscape to determine if it aligns with your investment strategy.

There is undoubtedly a remarkable transformation in retail investor participation. More individuals are diving into speculation and investment, whether it’s due to the meme stock craze, a risk-seeking mentality, or unprecedented monetary policies.

Chapter 2: Market Trends and Shifts in Investor Behavior

Over the past year, the average performance of stocks has been underwhelming. The percentage of stocks trading above their 200-day moving average has been in a steady decline since February 2021. Until that point, the market was thriving, but a notable shift occurred, steering focus toward more value-oriented stocks.

This transition was sudden and jarring; many newly engaged speculators were fixated on popular names like Tesla, Peloton, SPACs, GameStop, and AMC. Meanwhile, seasoned investors were discreetly pivoting away from overvalued tech stocks.

In summary, the likelihood of achieving consistent returns with randomly selected stocks has diminished, likening the market to a falling knife.

The market breath has been deteriorating since February 2021, yet net flows have risen each month, indicating that the average investor is facing significant challenges this year.

Adding a macroeconomic perspective, we find ourselves in a 40-year high inflation scenario, experiencing the largest rate hikes since 2000, and entering a phase of Quantitative Tightening, contributing to a risk-averse sentiment.

The contrast between retail and institutional investors is stark. Institutions wield the financial power to influence market movements, while retail investors often lack a comprehensive strategy. Recent market fluctuations exemplify this dynamic, as the Nasdaq Composite reached its peak on November 15, falling 30% since then, all while retail investors continued to funnel money into the market.

As retail investors often lack a defined approach, they may be the first to exit when conditions worsen. The repercussions of an average retail investor facing losses may go unnoticed, but the impact of institutional failures will certainly resonate throughout the market.

Observing how these dynamics unfold will undoubtedly be a captivating spectacle!