Retail investing boom may spark concerns, but strategist says markets have lived through it before

Key Points

• Retail investors have opened a huge number of accounts at online brokerages this year. Red flags were raised after those retail investors piled into riskier segments of the market.
• Markets have rallied from their March lows, but have seen a sell-off in recent sessions.
• Christopher Smart, chief global strategist at Barings, said: "I think the one piece of good news today is it seems like, in spite of the sell off, volatility seems to be more muted today, which suggests that the market is beginning to find a floor."

SINGAPORE — Retail investors have been fueling a frenzied buying boom in markets this year, sparking fears that they are driving too much speculation in the market.

But Christopher Smart, chief global strategist at Barings Investment Institute, suggested that the risks could be overblown.

"It's something we've lived with — through the dotcom bubble and market ups and downs since then — as retail investors, obviously when there's a big run-up, it tends to draw retail investors in, late in that process," he said.

"I think the one piece of good news today is it seems like, in spite of the sell-off, volatility seems to be more muted today, which suggests that the market is beginning to find a floor," Smart added.

Retail investors have opened a huge number of accounts at online brokerages this year. Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers all experienced a big boost in activity, while millennial-favored Robinhood saw a historic 3 million new accounts in the first four months of 2020.

Red flags were raised after those retail investors piled into riskier segments of the market. At one point, some bankrupt stocks and penny names saw their shares double in one session, while the most beaten-down shares were also bid up drastically. 

Markets have rallied from their March lows, but have seen a sell-off in recent sessions. In particular, the six biggest tech stocks have lost more than $1 trillion in the last three days – coming off a massive rally that peaked last week.

"We've had an enormous run-up for the past six months, and a correction is natural," Smart said.

"In any correction, there's always an opportunity to shift from the technology stocks that have had such a huge run-up, into other stocks that look much better in terms of valuations," he added. "As … confidence returns to the recovery story … as every major economy continues to improve, and so I think as investors start to get a better sense of that, they will start looking to the so-called old economy stocks."

— CNBC's Yun Li and Todd Haselton contributed to this report.