Inflation & Bond Yields
The US CPI release for February was slightly above consensus expectations, and contrary to what we expected under such circumstances, bond yields did not head lower. Instead, there was a sell-off of 5 basis points (bp) on the 10-year. We got that wrong.
Nevertheless, over the past two weeks, Treasury yields have declined by approximately 15bp. Client demand for bond offerings from dealers remains strong, and inflation forecasts have not been revised upwards in response to the latest CPI release. An independent economist suggests that the February CPI data indicates a slight reduction in core-PCE, further widening the gap between the two inflation measures. However, we have not verified these calculations firsthand.
Given the higher emphasis on shelter costs in CPI inflation compared to PCE, the difference between the core inflation measurements is likely to widen further this year as rent prices and mortgage payments converge.
Nvidia and Retail Investors
Despite Nvidia's remarkable success, the volatility of a $2 trillion market cap company, with stock prices fluctuating by 10% intraday, is disconcerting. It is uncommon for a company with a relatively low debt-to-equity ratio to experience such share price volatility, even within the tech sector. At this stage, it is nearly impossible to say whether the fair price for Nvidia is $500 or $1000, as investor demand rather than fundamentals or financials seems to dictate the price.
Public disclosures reveal that short interest in Nvidia shares has remained relatively stable at around 27 million, approximately 1% of shares outstanding.
Robinhood Holdings
Robinhood data shows that Nvidia ranks among the most popular stocks owned by retail investors.
Based solely on the information provided, it's hard to argue that retail trading is the main driver of Nvidia's stock volatility when considering its market capitalization. We require additional data spanning back several months to establish a baseline. The Robinhood team is kindly gathering historical data for us.
Retail investors tend to hold onto underperforming stocks longer than a typical long-only fund, which aligns more closely with benchmark constituent weightings. Indexing compels fund managers to add to winning positions and cut losses. At the beginning of this year, most mutual funds were neutral or long on Nvidia relative to their benchmarks. Mutual funds' marginal demand for Nvidia shares is influenced by net fund inflows.
The average Robinhood portfolio has significantly underperformed the Nasdaq.
Nvidia is also a hot topic on Reddit forums,
with daily mentions on the subreddit Wall Street Bets tallied below:
ARKK ETF
This may be an instance of good ideas being poorly executed, similar to the ARK ETF managed by Cathie Wood, which has recently underperformed the Nasdaq significantly. There appears to be more hype around top-performing stocks than actual ownership. The ARK ETF trade blotter—published daily—shows signs of negative portfolio selection, where winning positions are reduced to support underperforming ones.
Conclusion
Based on the current information, it's impossible to definitively state that retail investors drove the recent surge in Nvidia shares. We anticipate a clearer picture once we receive more data from Robinhood. However, it's very likely that individual investors have contributed to the recent rally in share price given the surge in interest on web forums. Net inflows into equity funds have almost certainly played a role, as fund managers aim to maintain or exceed benchmark exposure to Nvidia. Underlying the market technicals are another set of stellar quarterly earnings.
Interestingly, should Nvidia shares decline, negative portfolio selection bias may lead retail investors to reduce holdings in other blue-chip US tech stocks.
Once we have more data, we can be more confident that the Nvidia share price is close to a correction. It certainly makes sense to take some chips off the table here. But, never short Big Tech. Technical factors related to equity fund flows are also motivating our view.
