Fundstrat Global Advisors co-founder Tom Lee told CNBC on Tuesday he believes retail investors will be a force in the stock market for years to come.
“I think GameStop is telling markets there’s a really bitter pill to swallow right now,” Lee said on “Fast Money,” referring to the trading frenzy involving the video-game retailer that has pitted hedge funds who had shorted the stock against small investors who hyped up the name in online chat rooms.
Lee, who also serves as Fundstrat’s head of research, said retail investors have ample cash that could be deployed into stocks and change in market dynamics, such as supporting higher price-to-earnings ratios.
“For the last 10 years, out of the $3 trillion that people saved, 94% of it went into the bond market, which means today, households are synthetically short stocks,” Lee said. “I think now some of that money is flowing into equities, and when money comes into equities, it really lifts all boats.”
The current moment is a reminder that not every investor is choosing their trades based on company fundamentals, Lee said, calling it a “mistake” to think otherwise. “The wisdom of the crowd means price is what we have to understand,” he said.
“The retail investor is having a huge impact,” added Lee, who used to serve as JPMorgan’s chief equity strategist. “Of course, it’s going to create, I think, inefficiencies but those can be exploited by other investors. I think people just have to understand, this is a wake-up call. It’s a bitter pill to swallow, but I think overall, it’s a very good force.”
For evidence of the impact individual investors can have on financial markets, Lee said look no further than bitcoin. The cryptocurrency has had a massive run in the last 12 months, up roughly 275% in that window. The digital coin, which has a history of volatile trading, has increasingly been embraced by numerous big-name investors on Wall Street who view it as an excellent hedge against inflation.
“Bitcoin is a great example of non-professional investors discovering a market. It’s now proven to be pretty valid, and what are seeing this year? Institutional investors are buying this hand over fist in huge amounts. They could’ve bought the entire supply of bitcoin in 2016 for 1/100th of the price.”
Disclosure: Tom Lee is a CNBC contributor.