US Retail Investors: Losing Their Spirit Animal

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Do you not touch the red-hot iron the second time? Retail investors who were burned by the bear market in 2022 are forgoing the strong rally in US equities this year. The Nasdaq Composite has gained more than 20% since the beginning of January. Elsewhere, the S&P 500 recovered from the banking turmoil in March to climb 9% over the period.

After buying stocks that furiously defeated in early 2023, the appetite of the DIY public has waned. According to JPMorgan Chase, retail trading orders in stocks and exchange-traded funds now account for less than 16% of all trading flows. This is down from a peak of 23% in late January.

Separate data from Vanda Research shows a similar pullback. Net inflows into US stocks by retail investors averaged about $874 million a day over the past month. This is the lowest level since November 2020 and is down from a record $1.5 billion a day set in February.

Retail investors have plenty of reasons to tame their spirit animals. Those who aggressively bought the regional bank stock sell-off in March are still taking a loss on their investments. Furthermore, the market rally appears to be led by a handful of megacap companies like Apple, Microsoft and Nvidia. The risk is that if they stumble, so will the broader benchmarks.

More and more individuals keep their money in cash or money market funds, which offer returns not seen for much of the past decade. Yields have risen to 4.85% on average from 0.02% in early 2022, according to a Crane Data index. Retail investors account for 36 percent of a record $5.34 billion in assets invested in U.S. money market funds, data from the Investment Company Institute shows.

The shares remain expensive by historical standards. The S&P 500 is trading at about 19 times forward earnings, compared to its ten-year average of 18 times. US equity markets may struggle to capitalize on the rally in the second half of the year. Don’t be surprised if more companies announce share buybacks as a way to shore up their stock.