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Shares of Tesla have fallen by about 24% so far this year while the S&P 500 has gained nearly 4%. Recalls, lawsuits and Elon Musk's controversial leadership have contributed to the automaker's declines. But retail investors don't seem to mind. They're still piling into the stock.
Tesla was among the most popular stocks purchased by Charles Schwab clients in January, according to the Schwab Trading Activity Index (STAX), which measures the broker's 35 million users to gauge retail exposure to the financial markets.
Overall, retail traders piled into Big Tech last month. Nvidia, Amazon, Microsoft and Advanced Micro Devices were also popular names.
Before the Bell spoke to Joe Mazola, director of Schwab Trader Education, about the growing importance of retail investors in markets, where Main Street is investing and why people are still enamored with Elon Musk.
This interview has been edited for length and clarity.
Before the Bell: Tesla was the most popular stock on your index, and yet it was the weakest of the Magnificent Seven. Why are retail investors so eager to invest in it?
Joe Mazzola: It's not Tesla, it's [Tesla CEO Elon Musk]. I think at some point this stock will have to trade at an automotive multiple, it's not going to trade on an Elon multiple forever. I don't know when that is. But all maturing companies within the growth sector, at some point, move towards their sector multiple. That has not occurred at this point for Tesla, but the assumption is that at some point it will.
Why is it so important to single out retail investors and track where they're putting their money?
We want to get an idea of the actual behavior of retail investors. This index isn't based on the attitudes of investors or what they say they're going to do, it shows what they're actually doing. There are times where we see a deviation between those things. I think that's important.
I think it adds a third prong to investor analysis. You have your fundamentals and your technical analysis, and now you have a little bit more. You know what retail accounts are doing. I see it as a tracking device for there's bullish or bearish sentiment in the markets.
Trading among retail investors was moderately low in January. Why the downturn?
Part of it had to do with increases in market levels in November and December. People likely came into the year with a heightened awareness that the rally could soon end. But I would say there was a reserved optimism, and our clients still want to be in the markets.
There's a strong economic backdrop here, and what we saw was a rotation trade [when traders shift their investments to certain industries in anticipation of the next economic cycle]. That was the theme for January.
Back in November and December, we saw rates start to crumble. The 10-Year [US] Treasury yield fell to about 3.8%. That's when we saw a lot of clients rotating into the utilities, real estate and financial sectors and those did very well.
But once it became clear that the Federal Reserve wasn't going to be as aggressive with rate cuts as we thought and after economic data came in a little bit hotter than expected in January, interest rates ratcheted up fairly quickly. Investors started buying more selectively, and exposure was added mostly through the Magnificent Seven [that's Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla].
Retail investors turned back the page and used their playbooks from the beginning of 2023, when we were in a similar situation with rates going up. They wanted growth stocks.
Is there a big difference between what retail investors and institutional investors are doing right now?
Retail investors may be playing catch up right now. They've been looking at the returns on the S&P 500 and realize they'd do much better if they were just invested in the Magnificent Seven. That also explains the rotation trade we saw at the end of last year.
Retail clients tend to follow institutional investors, that's something we teach in our educational offerings. We want them to be able to see where big money is going.
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