Traders are significantly more bullish than last year: survey

Randy Frederick, Vice President of Trading and Derivatives at Charles Schwab, discusses Tuesday’s market action, as well as the latest findings of the Charles Schwab Active Trader Pulse, which include: traders are significantly more bullish amid the vaccine roll-out and improving economic conditions, how traders are changing their strategies, and economic outlook.

Video transcript

- Let's talk about how investors are feeling about all this. They feel pretty darn good, according to the latest data from Charles Schwab. Traders significantly more bullish now than they were certainly a year ago. Randy Frederick is the vice president of trading and derivatives at Charles Schwab Investment Management. And Randy, if I may, before we get to the data, which is really fascinating, I do, if I could, I want to ask you about today, because we are now seeing stocks accelerate to the downside. And so I wonder if there's any kind of perspective you could give us on what's going on here.

RANDY FREDERICK: Yeah, well, there's not a specific catalyst that I can see right at the moment, but keep in mind, I mean, the S&P 500 hit an all-time high just last week Thursday. So when you're at these levels, you tend to be very vulnerable to any sort of news stories, whether that's a big news story or just anything. And [? I guess ?] you were just talking about, earnings season has been spectacular, despite very optimistic outlooks, a very optimistic outlook as a result. And we're [INAUDIBLE] on the back half of that.

Now, [INAUDIBLE] more than 50% of companies have already announced. You add to that the inflation concerns that you also just talked about, seasonal effects-- a lot of people are talking about a potential sell in May and go away this year. We don't get that every year, but there have been times where that has happened. And the trajectory of the market, which is something I've talked about quite a bit in the last several months, is quite similar to what we saw in 2009 and then at this point in time in 2010. All of these things sort of coalescing at the same point kind of puts us in a position where we're either due for some consolidation or I think actually some-- a little bit of pullback. Not necessarily correction territory, but a minor pullback, I think, certainly could be in the cards here.

- So in the context of that, Randy, and we look at your active trader polls, which you guys just put out, 48% of the folks you surveyed are bullish, 15% bearish, 37% neutral. And you know, at first blush, that 48% might actually seem a little bit low, given the gains that we've seen in the market. But maybe it's for the reasons that you talk about, that people are thinking things are a little toppy here? What do you think?

RANDY FREDERICK: Well, it's actually not low from a historical perspective, especially with regard to this particular survey. You never get really high numbers. We see things maybe as high as mid 50s is about as high as it ever gets. And it's just people, I think, are a little bit tentative to say, yeah, I'm really bullish, almost as if they're concerned that they're going to jinx the market if they get too optimistic. But relative to the most recent survey, or the one we did a year ago, as you saw, it is quite high.

But again, what we also see is that people are optimistic, but at the same time, they've told us that they think the easy gains are already in the rearview mirror, which, frankly, that makes sense, right? The S&P 500 is up 88% since it bottomed in March of last year. It wasn't easy gains while it was happening, but now that it's in, you know, in the past, it looks pretty easy. So I think it would be a little foolish to think we might get 88% in the next 12 months. Probably not. But we could see 10% upside from here. But not until, I think, again, as I mentioned, we go through some sort of period of consolidation or pullback. I think it might be September or so before we sort of get that latter half of the year rally that we often see.

- Randy, what could spook the market here in the near term?

RANDY FREDERICK: Well, a number of things. I mean, certainly, as we talked about, inflation concerns. I think they're a bit overblown. It's just that inflation has been so low for so long, any sort of uptick is going to seem really large. But the kind of concerns that people have about maybe runaway inflation like we saw during the Paul Volcker era, I don't think that's in the cards. I really don't see that as a possibility.

And in fact, the Treasury interest rates on the 10-year have really leveled off for about the last four or five weeks now. That kind of shows that what's built into inflation expectations is probably already there. So I don't think that's a big concern. But again, I think a lot of it is seasonal effects, just all-time highs, any sort of negative news, those sorts of things will come into play. And again, just the kind of seasonal patterns are probably the biggest issue, which, again, is why I'm looking for a more modest pullback, rather than an actual full correction.

- Hey Randy, one of the debates that we kept having last year, particularly at the end of last year, was value versus growth, and value seemed to be gaining some steam. That's really been flipped in your survey, which is so interesting. I mean, and I guess tracks with kind of what we've been hearing from investors, as well, people like growth again.

RANDY FREDERICK: Yeah, so if you look back historically on market patterns, what you tend to see is that when the market is in an up phase, in a bullish phase, certainly growth, cyclicals, those sort of things are always going to garner a lot of attention because investing in growth stocks-- technology, for example, consumer discretionary-- are the-- is an optimistic viewpoint. So but when you look through periods of pullbacks or even periods of correction, you will always see very quickly that people flip to the value stocks or the more conservative investments, the more stable, if you will.

But those periods of time are very short-lived, and soon as the market gets back into a bullish phase, then people start buying growth again. This year's been a little bit odd in that, you know, everything's sort of been turned upside down by the pandemic of last year, where we have had some periods of outperformance in value, even despite the market not actually going down. So I think what people look at that and say, OK, well, that's an anomaly, that's not how things typically work.

And if they overall are bullish, as we just talked about, they generally tend to be, then they're likely to look more at the growth things. And so if you have a short-term period where growth underperforms, well, that represents actually a pretty good opportunity from a long-term perspective to invest in growth, because again, if your long-term perspective is bullish, then that's where you want to be.

- Randy, we have had a legion, an army of new investors come into this market this year, and they're trading very actively. But should they be trading as much as they are from day to day?

RANDY FREDERICK: Well, actually that has gotten a lot better. So all-time market volumes, both in the options and equity markets, peaked in January. They've come down in February, March, and April, every month a little bit. That is a good sign because, yes, there was a bit of irrational exuberance, if you want to use a different term, certainly back then. But that has definitely hit its peak, and it has trended lower for four straight months. But I don't know that we'll necessarily ever get back to the levels we were before.

And frankly, I think that's a good thing. Despite the fact that some of those people probably lost money-- we hear all the stories about the young person that turned 50,000 into 5 million, but there are a lot more stories about those lost money. And while some of them might get scared out of the market, many of them may leave the markets and go back to investing-- or betting on-- gambling and-- or betting on sports, or whatever it is they used to do, many of them are going to be intrigued and curious about investing, and will find ways to do a little research, get educated, think about how they can do this over the long haul, and actually start planning for retirement, those sorts of things.

So I think there's a very positive benefit to all of this. But yes, some of the data illustrates that people under 30, something like 40% of them traded for the very first time in 2020. And a lot of them are going to stick around. That's a very good thing because that's really what we want. We want to see long-term investors. We certainly want to see that happen to people who are young in their career, when they have the opportunity to start getting the benefit of being in the market for the long haul.

- They are definitely getting an education these days. Randy Frederick, thanks so much. Always great to talk to you. Vice president of trading and derivatives at Charles Schwab Investment Management.