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Why retail trading ‘might be here to stay’

Bank of America Sr. U.S. Equity Strategist Jill Carey Hall joins Yahoo Finance to discuss how retail trade might be here to stay as it continues to persist and how market views are adapting to the disruptions from these meme stocks.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Tuesday morning. As our viewers are well aware, the retail bid within this market remains alive and well. AMC shares this morning hitting a record high as some of that meme energy remains within the market. So how are big institutions thinking about the role that retail is playing at this point in time?

Joining us now to discuss is Jill Carey Hall, Senior Equity Strategist over at Bank of America Global Research. So Jill, let's start with that retail side of the equation. Just at this point how you guys are thinking about both how seriously investors need to follow some of these trends, and how persistent you're starting to think this activity may remain given that there's been you know, several points over the last year where it seemed like finally retail has gone away, but just a very persistent part of this market?

JILL CAREY HALL: Right. Thanks for having me. And I think the rise of retail trading, some of that might be here to stay. You saw retail volumes as a share of the market start to tick up. Before any of this happened in January a lot of it was as COVID started and even before that because you have high savings rates for consumers, obviously more time at home in front of the computer and obviously, now stimulus. So I think some of that can persist, but there's likely to be some simmering in that retail trading as we progress through the year as consumers go back out to work and into the world, spend maybe less time at home sitting in front of their computers, stimulus peaks so you know, some of it might be here to stay, but obviously reasons that we could see less of it going forward.

BRIAN SOZZI: Jill, why do you think we have seen the ebbs and flows? You know, there were a couple months recently where that meme stock trade, it went dormant, there was really no big moves higher or lower. We saw it come back in earnest the past two weeks and now it seems to be dormant again, what drives it?

JILL CAREY HALL: Some of it has corresponded with stimulus. When we've looked at the correlation of some of these stocks like GameStop in relation to stimulus checks, there's obviously been some correlation there. But I think some of it as we've just seen like I said, more time at home and in front of consumers' computers, we've seen some ebb and flow in it, and obviously, that can continue. But I think from an investment perspective we don't think that this poses broader risks to the market in the area that a lot of this is occurring, which is in the small and mid-cap universe.

So I think regardless of whether we continue to see similar pops like this in some of these so-called meme stocks, you know, investors broadly that we've surveyed don't largely think this poses long-standing risks to small and mid-caps as a size segment. So we still favor small caps from an investment perspective right now relative to large caps. A number of reasons for that, but from the investors that we've surveyed, they don't see speculative retail activity as likely to be a key risk going forward in terms of investing in small caps.

JULIE HYMAN: Hey, Jill. It's Julie here. What about sort of isolated risks? And I'm wondering in particular, I know that you guys have done some hedge fund surveys of what their positioning looks like. And certainly part of the Reddit trade story has been a short squeeze story. And so I wonder how you're thinking about the potential for more short squeezes and how that's going to affect hedge funds?

JILL CAREY HALL: Yeah, certainly a lot of these stocks where we've tracked what are the top mentioned stocks on Reddit's WallStreetBets forum. And one commonality is certainly that many of them have had high short interest. So that's something that investors want to track this going forward. They're interested in tracking alternative data sets like the ones we published, which stocks are the most mentioned on Reddit as it poses risk of crashes so to speak. That can certainly impact long-short investors who are short these stocks.

When we surveyed institutional investors, both long and long-short investors earlier this year, investors, some of them indicated that they may change what types of stocks they're shorting going forward. So there could be less shorting of small caps but long-short investors were largely indicating that they're going to try to shift their positioning around more frequently based on how often they disclose their holdings. So certainly risk that this could continue to happen if there is a targeting of high short interest stocks.

But I think going forward, a lot of these stocks tend to exhibit higher fragility, which is the tendency to go from periods of calm to stress at a record pace. That's what we found with some of these stocks. So certainly worth monitoring these stocks that show up on the list going forward.

MYLES UDLAND: And Jill, we're kind of between earnings periods here, but we've continued to see pretty persistent upward revisions of estimates from analysts. As you guys look at, you mentioned you still favor small caps here, do you still feel like there's upside risk, kind of a replay of Q1 where the Street was just way too conservative on so many of these different names. Does that still feel like a risk for small and mid caps as we head into Q2 earnings season?

JILL CAREY HALL: We have continued to see across the market and across size segments more upward than downward revisions to earnings forecasts. Going into the last earnings season, typically when you see analysts they're cutting estimates, going into the earnings season they were obviously still raising estimates. And then we saw a large beat even on top of that.

So I think at this point we still see small caps as an attractive area given the shifts that we're seeing within the market where goods spending held up very well during the pandemic. But now as some of the retail sales, the car data that we're looking at, you're now seeing more of a shift toward services spending, which we expect to continue. A lot of pent-up demand for services is something that should benefit smaller stocks over larger stocks given there's more exposure to the services economy.

And a lot of the more cyclical areas within the market and within small caps in particular, just haven't been pricing in the recovery as much, even though we are more advanced in this recovery in the US than in some other regions. So cyclical sectors within small caps are still trading at a pretty sizable historic discount to the rest of the index. And small caps are still trading at a historic discount to large caps.

MYLES UDLAND: All right, Jill Carey Hall, Senior Equity Strategist at Bank of America Global Research. Jill, always appreciate the time. Thanks so much for jumping on this morning.

JILL CAREY HALL: Thanks.