Behind the resilience of the US stock market: the younger generation of retail investors "buy on dips," unaware of what a bear market is

A new investment paradigm is reshaping the U.S. stock market, driven by a group of young retail investors who are determined to "buy the dip." Their steadfast belief in buying against the market downturn has provided unexpected support to the market.

Recent market dynamics confirm this trend. In early August this year, the market experienced a decline due to disappointing employment data but quickly recovered. A more significant example occurred in April this year; according to JP Morgan data, after April 1, the S&P 500 index fell about 5% over two consecutive trading days, but retail investors recordingly flooded into the market during this period.

Data shows that this buying power is substantial. According to EPFR data, in the week ending April 9, U.S. stocks and mutual funds recorded a net inflow of $31 billion, buffering the market's volatility. For many seasoned Wall Street professionals, this behavior is another sign of an overheated market, especially as large tech stocks are valued at historical highs.

However, the resilience of retail investors may not just be a fleeting optimism. Their willingness to stay in the stock market may be more enduring than many market veterans expect, which in turn could help ease the eventual mean reversion process of overvalued stocks, providing an unprecedented "buffer" for the market.

A New Generation of Investors Rewriting Market Logic

This generation of investors is markedly different from their predecessors. Few among them remember the painful experiences of the dot-com bubble burst or the financial crisis. Instead, the current batch of young investors has primarily experienced a bull market since opening their accounts, and early investment successes have made them more willing to take risks and encouraged them to hold on during turbulent times.

When the Federal Reserve raised interest rates in 2022, the S&P 500 index fell 19%, marking the largest drop since 2008, which tested the retail investors' tendency to "buy the dip." However, many investors chose to hold firm. According to EPFR data, U.S. stock mutual funds and exchange-traded funds still recorded a net inflow of $27 billion that year. They were soon rewarded. After this decline, the S&P 500 index experienced its best two-year performance in 25 years.

In contrast, the memories of the older generation of investors are starkly different. EPFR data shows that during the 2008 financial crisis, investors withdrew nearly $50 billion from U.S. stock funds, and even after the market bottomed in March 2009, the outflows continued for four years, causing them to miss the start of the longest bull market in U.S. history.

Wealth Effect and Social Change

Today, stocks are more closely intertwined with the financial situation of the American public than ever before. Ed Clissold, Chief U.S. Strategist at Ned Davis Research, pointed out that in the first quarter of this year, the proportion of stocks in household financial assets soared to 36%, the highest level recorded since the 1950s.

The continuously rising stock market has brought significant wealth effects. By the end of 2024, the number of 401(k) millionaires at Fidelity reached a record 537,000. Veteran market observer and former Chief Investment Strategist at Leuthold Group, Jim Paulsen, stated:

"The success of investing makes people bolder; you start to feel, 'This is the game rule, I can withstand the pullback.'"

At the same time, broader social changes are also driving this trend. Trading and gambling have evolved into a form of entertainment for many Americans. Technological advancements have made trading various assets unprecedentedly convenient and inexpensive, with some brokerages even "gamifying" their applications to create a casino-like atmosphere. This environment keeps retail investors highly engaged.

Retail Influence Continues to Expand

These retail investors have become an undeniable force in the market. According to JP Morgan data, recently, retail trading has hovered around 20% of total options trading activity, even surpassing the peak during the 2021 "meme stock frenzy."

In the stock market, their influence is equally significant. According to brokerage Jefferies, retail investors account for about one-fifth of total trading volume in the stock market, which, although slightly lower than the peak in 2021, is double the level of 2010. This scale means their collective actions can have a substantial impact on market direction.

Of course, every bull market will eventually come to an end. When the market reaches a turning point, higher valuations mean sharper declines. Wall Street professionals generally view the enthusiasm of retail investors as a signal of market bubbles and are concerned about current valuation levels.

However, if investor psychology has indeed undergone a structural change, the market may have an undervalued buffer. Today, this new generation of bullish investors may play the role of past short-covering during market downturns, limiting the market's decline by buying in when everyone else is selling. A client survey by Charles Schwab also confirms this, with about 80% of respondents indicating that they plan to buy on dips if the market experiences volatility in the coming months