Reddit retail traders are back

Happy Friday eve, team.?Phil Rosen here. Did you catch yesterday's Fed minutes release??

It looks like central bank officials unanimously agreed that the last rate hike of 25 basis points was the appropriate size, and that slowing down the pace would "better allow them to assess the economy's progress."

But several participants would have also backed a half-point hike, the minutes showed.?

That tells us we should be taking the Fed at its word: The inflation battle isn't over.?

Jerome Powell has said as much on several occasions, and yesterday St. Louis Fed President James Bullard maintained that the economy can still?withstand more aggressive policy.?

And yet, despite the dip this week, markets right now are brimming with bullishness — and?Reddit-loving retail investors are partying like it's 2021.

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1. The everyday traders that powered the meme-stock boom?of two years ago are back in force,?flying in the face of Jerome Powell's hawkishness?and helping fuel the stock rally of the last seven weeks.?

Data from Vanda Research shows retail investors have been spending a record $1.5 billion a day on stocks this year,?a total reversal from last year's brutal sell-off.

Remember, at the start of the pandemic, government stimulus and near-zero interest rates?gave retail investors the perfect opportunity?to lay down speculative bets.?

That set the stage for rallies in meme-stocks?like GameStop, AMC, and Bed Bath & Beyond, which ultimately led to a?high-profile battle with hedge funds?trying to short those companies.?

Fast forward to 2023 and the retail cohort is back — with a $1.8 trillion stash ready to deploy.?

That number balloons to nearly $5 trillion, Fundstrat's Tom Lee said, if you include the roughly?$3 trillion parked in money market funds?held by institutional investors.?

Gene Goldman, chief investment officer?for Cetera Investment Management, told me that the spike in enthusiasm comes from?hopes that the economy can avoid a recession, even though a downturn is still in the cards.

"With all of these headwinds, retail investors are jumping in on maybe some ill-conceived optimism," Goldman said.?

Currently, the New York Fed's Recession Probabilities Model?puts the odds of a recession at 57%, which is the?highest it's been in roughly four decades.

But economic data be damned, retail investors are still piling into the riskiest corners of the market.?

Crypto, EV stocks, and growth picks — last year's biggest losers — have?broken through as early favorites. Even triple-digit surges in?SPAC stocks have made a comeback.

"There is an old adage 'don't fight the Fed,' but this behavior is not just fighting but also?taunting the Fed?with crypto, meme stocks, and unprofitable companies responding best to Fed communications," JPMorgan wrote in a note to clients.?

If 2023 shapes up to be even vaguely similar to last year, there's a chance investors will regret sticking their necks out again as the Fed stays vigilant longer than expected.?

Read the full story on how retail investors are reviving the pandemic playbook — and why the Fed could end up crushing the market anyway.

Are you surprised by the heavy retail trader activity to start the year? Let us know in the comments.

In other news:

2. Meet a top-5% fund manager who says he's becoming increasingly optimistic about the economy.?Jeff Muhlenkamp's outlook on stocks has come a long way since he stashed nearly half his portfolio in cash last summer.?These are his six favorite stocks to buy now.

3. A fund manager recommended buying into this batch of dividend stocks to collect consistent cash payments.?Regular returns will be key in a high-inflation environment, said Mike Morey, who outperformed 95% of his peers in 2022.?See the list of 16 names.

4. This real-estate investor said a perfect storm of problems put him in a $27,000 hole.?Everything became more expensive in a short stretch of months, Marky Suazo said. He shared what spoiled his BRRRR strategy —?and how he plans to adjust for future deals.

5. Berkshire Hathaway's portfolio has a handful of stocks that are winning big to start 2023.?Some of the largest stakes in Warren Buffett's company include Apple, Bank of America, and Kraft Heinz.?But none of those are among the five best-performing stocks so far this year.

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