The earnings of self-serve investment firms may confirm a nascent trend this week.
“Appetite for risk is rising,” Tom Roseen, an analyst with fund tracker Lipper Inc., told the Dallas Morning News. “People are betting on the economy to grow a little bit.”
One of the biggest critiques of the current rally has been the shallow pool of investors participating – with mutual funds and investment banks getting back in the game, but smaller, retail investors sitting on the sidelines.
Should we see an increase in earnings at self-serve investment firms – like Schwab, TD Ameritrade, Scottrade, and others – then that critique may no longer hold. As retail investors join in the rally, we could see stocks hit new highs for the year.
It is important, though, to dig deep inside the numbers. Earnings alone don’t tell us enough – with cost-cutting measures potentially taking away from the bottom line (and improving earnings), but without supplying sustainable forward growth.
Rather, revenues are the most important numbers coming out in earnings reports this quarter. Further, if we see self-serve investment services increasing revenues through transaction fees, then we’ll know that retail investors are getting back into the market.
That’s good for the market as a whole, indicating another segment of the population preparing to push indexes higher. And it’s especially good for the investment firms themselves, who will see a sustained increase in business.
However, current market trends still warrant watching, even should the news all prove good. Roseen again, this time speaking with the Salt Lake Tribune: “My caution in seeing these great numbers (at mutual funds) is that people are going to start jumping back in when, in fact, maybe we’re due for a little breather. We’ve got to take a break.”
Conversely, there are some who believe that sideline money is key – but that investors haven’t been sitting on the sidelines for the bull run. Rather, as they reach breakeven, retail investors are now exiting the market.
Should this prove true, we should notice the trend in the revenue breakdowns of self-serve firms as well. This would also provide one of the most mixed signals possible.
The exiting money would be a bearish pull. But a market dominated by professional traders should show bullish tendencies.
In short, the revenue reports of self-serve investment firms will tell us a great deal about the current makeup of market investors. It should give us a clue as to whether money is starting to flow into – or out of – the market. And markedly upbeat revenue growth may very well indicate the next leg up for the current market.
But missed revenue most likely would indicate retail investors still sitting on the sidelines – or heading there quickly. This would likely – but not definitely – be a bearish indicator.
The lesson, as always: be vigilant.
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