Global
retail investors are significantly increasing their exposure to equities
following the Federal Reserve’s (Fed) first
interest rate cut in four years, according to new data from eToro. Riskier
assets are gaining in favor of Forex (FX) market and cash, where a decline in
investor interest is becoming more evident.
Retail Investors Flock to
Stocks as Fed Begins Rate-Cutting Cycle
The eToro’s
quarterly Retail Investor Beat survey, which polled 10,000 retail investors
across 12 countries, revealed a marked shift towards stocks and away from cash
assets in the third quarter of 2024. The proportion of investors holding
locally listed stocks jumped from 49% to 54%, while those invested in
international equities surged from 31% to 36%.
This
reallocation comes on
the heels of the Fed’s decision last week to lower interest rates,
signaling an end to the era of high-yield savings accounts. As a result,
investors appear to be seeking higher returns in the stock market.
“With
the Fed finally pulling the trigger on interest rate cuts, we are seeing the
beginning of the end for bumper savings rates,” said Sam North, an analyst
at eToro. “This will inevitably lead to more people looking to the stock
market to achieve a better return on their cash.”
The trend
towards equities was particularly pronounced among millennial investors, aged
29 to 43. This group saw a 16% quarter-over-quarter increase in local stock
ownership and a 24% jump in foreign stock holdings. In contrast, Generation Z
investors showed more modest increases, while the oldest investors, the
so-called silent generation, reduced their stock exposure.
North
attributed the millennial-led charge to their longer investment horizons and
greater cash availability compared to younger investors. “This generation
has the luxury of time on their side, allowing them to ride out market ups and
downs in pursuit of long-term growth,” he explained. “Gen Z is already
fairly well invested, whilst the oldest cohort of investors is sensibly scaling
back to safeguard their wealth.”
The report
also showed which sectors of the increasingly popular stock market are
attracting the most investor attention. While technology shares remained
popular, with 44% of investors allocated to the sector, healthcare and energy
also saw significant increases in investor interest.
As the
Fed’s rate-cutting cycle gets underway, these shifts in retail investor
behavior could have significant implications for market dynamics in the coming
months. With cash becoming less attractive and equities gaining favor, the
stock market may see continued inflows from individual investors seeking higher
returns in a lower interest rate environment.
Due to the growing popularity of stocks, eToro added over 1,000 UK shares to its offerings in July through its latest collaboration with the London Stock Exchange. This month, it has established a similar partnership with the German stock exchange, presenting investors with 290 local stocks
Why Rate Cuts Increase
Stock Prices
Interest
rate cuts by the Fed typically have a positive impact on stock prices for
several reasons:
- Cheaper
borrowing for businesses - Increased
consumer spending - Relative
attractiveness of stocks - Discounted
cash flow models - Economic
stimulus - Market
psychology
The Fed Just Cut The rates, Time to pump Stocks!
— Cameron Fous (@Cameronfous)
Yes, but only for +4% within 22 days before the SP500 crashes -22% within 110 days.
Albeit, ending +14% for 12 month total gain.
These are the stats for FED rate cut pivot over the last 50 years pic.twitter.com/qDpVErQ07p
When
interest rates are lowered, companies can borrow money at lower costs. This
allows them to invest in growth initiatives, expand operations, or refinance
existing debt at more favorable terms. These factors can lead to improved
profitability and higher stock valuations.
Lower
interest rates make borrowing more affordable for consumers as well. This can
stimulate spending on big-ticket items like homes and cars, boosting economic
activity and corporate earnings.
As interest
rates decline, the yields on fixed-income investments like bonds and savings
accounts become less attractive. This prompts investors to seek higher returns
in the stock market, increasing demand for equities and driving up prices.
Many
investors use discounted cash flow models to value stocks. Lower interest rates
reduce the discount rate used in these models, making future earnings more
valuable in today’s terms and potentially increasing stock valuations.
“A lower
interest rate environment is also good for listed businesses, meaning we can
expect earnings to remain resilient or even grow, which further supports equity
markets,” added North. “As a result, investors are likely to continue
reallocating funds from cash to equities in search of higher returns.”
Rate cuts
are often implemented to stimulate economic growth. A stronger economy
generally leads to higher corporate profits, which can translate into rising
stock prices. What is more, the mere anticipation of rate cuts can boost
investor confidence and risk appetite, leading to increased buying activity in
the stock market.
It’s
important to note that while rate cuts often have a positive impact on stock
prices, the relationship is not always straightforward. Other factors, such as
economic conditions, geopolitical events, and company-specific news, can also
influence stock market performance.
Global
retail investors are significantly increasing their exposure to equities
following the Federal Reserve’s (Fed) first
interest rate cut in four years, according to new data from eToro. Riskier
assets are gaining in favor of Forex (FX) market and cash, where a decline in
investor interest is becoming more evident.
Retail Investors Flock to
Stocks as Fed Begins Rate-Cutting Cycle
The eToro’s
quarterly Retail Investor Beat survey, which polled 10,000 retail investors
across 12 countries, revealed a marked shift towards stocks and away from cash
assets in the third quarter of 2024. The proportion of investors holding
locally listed stocks jumped from 49% to 54%, while those invested in
international equities surged from 31% to 36%.
This
reallocation comes on
the heels of the Fed’s decision last week to lower interest rates,
signaling an end to the era of high-yield savings accounts. As a result,
investors appear to be seeking higher returns in the stock market.
“With
the Fed finally pulling the trigger on interest rate cuts, we are seeing the
beginning of the end for bumper savings rates,” said Sam North, an analyst
at eToro. “This will inevitably lead to more people looking to the stock
market to achieve a better return on their cash.”
The trend
towards equities was particularly pronounced among millennial investors, aged
29 to 43. This group saw a 16% quarter-over-quarter increase in local stock
ownership and a 24% jump in foreign stock holdings. In contrast, Generation Z
investors showed more modest increases, while the oldest investors, the
so-called silent generation, reduced their stock exposure.
North
attributed the millennial-led charge to their longer investment horizons and
greater cash availability compared to younger investors. “This generation
has the luxury of time on their side, allowing them to ride out market ups and
downs in pursuit of long-term growth,” he explained. “Gen Z is already
fairly well invested, whilst the oldest cohort of investors is sensibly scaling
back to safeguard their wealth.”
The report
also showed which sectors of the increasingly popular stock market are
attracting the most investor attention. While technology shares remained
popular, with 44% of investors allocated to the sector, healthcare and energy
also saw significant increases in investor interest.
As the
Fed’s rate-cutting cycle gets underway, these shifts in retail investor
behavior could have significant implications for market dynamics in the coming
months. With cash becoming less attractive and equities gaining favor, the
stock market may see continued inflows from individual investors seeking higher
returns in a lower interest rate environment.
Due to the growing popularity of stocks, eToro added over 1,000 UK shares to its offerings in July through its latest collaboration with the London Stock Exchange. This month, it has established a similar partnership with the German stock exchange, presenting investors with 290 local stocks
Why Rate Cuts Increase
Stock Prices
Interest
rate cuts by the Fed typically have a positive impact on stock prices for
several reasons:
- Cheaper
borrowing for businesses - Increased
consumer spending - Relative
attractiveness of stocks - Discounted
cash flow models - Economic
stimulus - Market
psychology
The Fed Just Cut The rates, Time to pump Stocks!
— Cameron Fous (@Cameronfous)
Yes, but only for +4% within 22 days before the SP500 crashes -22% within 110 days.
Albeit, ending +14% for 12 month total gain.
These are the stats for FED rate cut pivot over the last 50 years pic.twitter.com/qDpVErQ07p
When
interest rates are lowered, companies can borrow money at lower costs. This
allows them to invest in growth initiatives, expand operations, or refinance
existing debt at more favorable terms. These factors can lead to improved
profitability and higher stock valuations.
Lower
interest rates make borrowing more affordable for consumers as well. This can
stimulate spending on big-ticket items like homes and cars, boosting economic
activity and corporate earnings.
As interest
rates decline, the yields on fixed-income investments like bonds and savings
accounts become less attractive. This prompts investors to seek higher returns
in the stock market, increasing demand for equities and driving up prices.
Many
investors use discounted cash flow models to value stocks. Lower interest rates
reduce the discount rate used in these models, making future earnings more
valuable in today’s terms and potentially increasing stock valuations.
“A lower
interest rate environment is also good for listed businesses, meaning we can
expect earnings to remain resilient or even grow, which further supports equity
markets,” added North. “As a result, investors are likely to continue
reallocating funds from cash to equities in search of higher returns.”
Rate cuts
are often implemented to stimulate economic growth. A stronger economy
generally leads to higher corporate profits, which can translate into rising
stock prices. What is more, the mere anticipation of rate cuts can boost
investor confidence and risk appetite, leading to increased buying activity in
the stock market.
It’s
important to note that while rate cuts often have a positive impact on stock
prices, the relationship is not always straightforward. Other factors, such as
economic conditions, geopolitical events, and company-specific news, can also
influence stock market performance.
This post is originally published on FINANCEMAGNATES.
