Fidelity’s appointment is a warning sign: Jared Dillian

The saying comes from the investment banking industry and its well-known cyclical hiring practices, loading up on bankers and traders when times were good, and purging them when the market went south. Fidelity is in a separate business — retail brokerage and asset management — but the same principles apply. Retail traders have turned to the markets over the past year as stocks staged an epic rally, with the benchmark S&P 500 index doubling from the early days of the pandemic. Increased business activity has increased the demand for customer service and support personnel.

This is similar to Vanguard in 2016-2017 during the index fund boom, which pushed the firm’s assets under management to more than $5 trillion. That period was very frustrating for so-called active money managers. There was much debate over whether indexing was a form of market socialism, not always polite, making it impossible for anyone to “beat” the broad index. At the time, I was with active managers, believing that the index fad was a fatal effect on the markets. But I would trade anytime for today’s retail stock-trading frenzy. Then, there was a condition for investors to buy and hold. Now, this is all just unproductive speculation.

The question is, is this a permanently high plateau of retail trading activity, or will a bear market frustrate all these new investors and leave trading stocks? I think we know the answer. But for the time being, retail trading makes up a larger and larger percentage of market volume, and retail brokerages are trying to take advantage of the opportunity and expand capacity. According to Bloomberg News, TD Ameritrade’s Investor Movement Index – a measure that tracks the position of clients in the market since 2010 – hit a record high in June. For a bear market, there doesn’t seem to be one on the horizon, with the Federal Reserve continuing to pump massive amounts of liquidity into the economy.

From a competitive standpoint, Fidelity may lack the “cool” factor and “gamification” offered by Robinhood Markets Inc., but it’s still doing a decent job at persuading young investors to open an account. It opened 700,000 new accounts for investors age 35 and younger during the second quarter. The conventional wisdom about these types of accounts with small balances used to be that they were unprofitable and less desirable, but now retail brokerages are willing to do a lot of unprofitable business in the hope that small accounts will one day become large accounts. This is more likely to happen at a place like Fidelity, which has a full suite of offerings to customers. Robinhood is purely for speculation, not for accumulating wealth.

Fidelity shouldn’t be trying to compete with the likes of Robinhood, and an effective marketing strategy would be to characterize Robinhood as irresponsible — the type of place where you trade “meme” stock like Gamestop Corp. Joke cryptocurrencies like Dogecoin. In the event that the stock market soon enters a protracted bear market, Fidelity will be in a better position than Robinhood to handle it as a diversified financial company that relies almost entirely on speculative trading activity. . Parallels with 1999 are impossible. Miss. The traders of the dot-com bubble throughout the day eventually gave up and went back to their day jobs. It took him 20 years to come back.

It is one of those time-tested sentiment indicators in the markets. Fidelity is probably the first company to announce a dramatic increase in its workforce, but it probably won’t be the last. Wait for Banks to follow suit, and then you know the top will be in. There is no such thing as a permanently high plateau.

Jared Dillian is editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics and author of Street Freak and All the Evil of This World. He may be interested in the areas he writes about.