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The COVID-19 pandemic battered the U.S. economy during the first quarter of 2020, resulting in the S&P 500 recording its worst first quarter since 1938 when the market closed on March 31, 2020.
Starting on February 20, the index dropped by ~35% in four weeks – the fastest 30%+ drop ever recorded in history.
U.S. stock markets are looking up since bottoming-out in mid to late March. Forming an almost perfectly V-shaped recovery, they rallied more than 40% by May’s end. A big part of the market turnaround has been attributed to new retail investors utilizing zero-cost brokers — particularly Robinhood. In fact, market and user data show a direct correlation between the rise in new retail investment and the rebound of the market.
The data clearly shows that Robinhood has seen massive growth, especially during the pandemic. But why?
LetMeBank’s Emily Deaton attributes that growth everyday people needing to find new sources of income as COVID-19 takes it’s financial toll.
“The high investment rates we saw in the app were the people who were looking for a new way to make money, when the rest of the world has let them down. If they can invest themselves, rather than relying on the investments of those they work with, they may be able to do better and stay afloat.”
Similarly, Loanry’s CEO Ethan Taub attributes it the rise in investment to the increased level of financial uncertainty.
“People were losing their jobs and they did not know where the next check was coming from, so they may have been more inclined to take a risk. Investing is usually a smart move in most circumstances, so I believe that those people who were logging in to the app were doing it with the thoughts of turning over a small profit.”
Though the COVID-19 crisis in the U.S. had been developing since as early as January, widespread concern about the virus did not begin until mid-February and worsened from there.
This is reflected in the health of S&P 500 returns for the first seven weeks of 2020. The market fluctuated between just shy of 50 and just below 60, but stayed relatively stable. Then, in mid-February, just as COVID-19 concern was beginning to rise, the market began a five-week dive between the weeks of February 17-23 (Week 8) and March 16-22 (Week 12)
During the week of March 16- 22 (Week 12) two things happened:
During the week of March 23-29 (Week 13), the S&P 500 began a consistent — if choppy — rebound, recovering more than half of the returns lost since bottoming-out.
But, when the market bottomed-out, Robinhood saw a major influx of retail investment between March 9 and May 24 (Weeks 11 and 20).
During the period between March 16 and May 17 (Weeks 12 and 20), S&P 500 returns recovered by 17.15% — nearly half the overall losses from the crash.
There’s a clear correlation between the quick and consistent rise of retail investment on Robinhood and the rebound of S&P 500 returns. As retail investment on Robinhood grew between weeks March 9 and May 24 (Weeks 11 and 20), the health of S&P 500 returns improved.
During the first seven weeks of 2020 — before concern about COVID-19 had really taken root — S&P 500 returns were, more or less, trending upward. Then, after peaking during the week of February 17-23 (Week 8), it began a five-week rapid decline before bottoming out the week of March 16-22 (Week 12), as discussed above.
Investment in Robinhood followed a reverse trend. During the first seven weeks of 2020, investment on Robinhood was, essentially, consistent. Then, during the week of February 24 – March 1 (Week 9), we see the start of a major influx of retail investment on Robinhood.
The week of March 16-22 (Week 12) is significant because it sees S&P 500 returns hit their lowest point (-29.25% from the start of the year) while Robinhood saw the largest volume of deposits in a single week – – 14x greater than when S&P 500 was peaking during the week of February 17-23 (Week 8).
Following the massive surge of retail investment on Robinhood, S&P 500 returns began to recover — recapturing 11.4% of returns the week of March 23-29 (Week 13) and rising to 19.1% to its highest point (so far) the week of May 4-10 (Week 19).
Next, we broke down the average dollars invested by credit score. The average amount invested across all credit scores was $4,770.63. Looking a little closer, we found that the average amounts invested by credit score were:
|Credit Score||Average Amount Invested|
These results align with how credit scores are generally understood to relate to financial behavior. Those with lower credit scores and, likely, less access to investment funds invested more conservatively, while those with high credit scores and access to more investment funds invested larger amounts.
Robinhood investors with credit scores of 650 or better invested more than double that of those of credit scores less than 650.
The transaction-related data used in this report was collected from one million unique transactions made by 5,000 Stilt users between December 30, 2019 and May 30, 2020. All credit score-related data was collected from the same Stilt users during the same period.
S&P 500 returns data for the period between December 30, 2019 and May 30, 2020 is based on publicly available data provided by Yahoo Finance.
The analysis in this report was based on plotting Stilt users’ transaction data against the S&P 500 returns for the same period (December 30, 2019 and May 30, 2020). The findings of this report are based on that analysis. Credit score statistics were determined by averaging all investment amounts in specific credit score ranges (less than 650, 650 to 750, and greater than 750) during the dates noted above.
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