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Retail Investors Reduce Stock Purchases, Exposing Market Fragility

The appetite for U.S. stocks among individual investors has diminished, leaving equity markets vulnerable after a turbulent first quarter. Retail investors enthusiastically purchased undervalued shares at the beginning of 2023, propelling the S&P 500 index upwards. However, their enthusiasm has declined in recent weeks, as indicated by Vanda Research data, which reveals a significant drop in net purchases of U.S. equities by individuals.

Record-Breaking Investments Turn to Caution

Individual investors set a monthly record for net U.S. equity purchases in February, a figure unmatched since Vanda Research began tracking data in 2014. Unfortunately, this trend has not persisted, with recent stock purchases plummeting to levels not seen since November 2020.

Marco Iachini, Senior Vice President of Research at Vanda, stated, “Retail investors have stepped off the accelerator. It was just unsustainable. Conviction is starting to be shaky.”

The percentage of bearish investors rose to its highest level since December, as revealed by the American Association of Individual Investors sentiment survey in March. This decline in investor interest coincides with a chaotic market environment following a banking crisis that blindsided the financial sector. The collapse of Silicon Valley Bank and Signature Bank led to regulators and bank executives scrambling to restore faith in the financial system.

Although U.S. stocks have demonstrated resilience in the face of adversity, concerns regarding a potential recession are mounting. As a result, investors are now questioning whether the Federal Reserve can orchestrate a “soft landing” in its efforts to control inflation rather than succumbing to a severe economic downturn.

Professional Money Managers Adopting a Cautious Approach

With retail investors retreating from U.S. equities, professional money managers are similarly hesitant. Bank of America Corp.’s March global fund manager survey found that fund managers’ allocation to U.S. equities is at its lowest point in 18 years.

Omar Aguilar, CEO and CIO at Schwab Asset Management, explained:

“Given that you can now enjoy good income strategies without necessarily having to take additional risk, clients are starting to look at rebalancing strategies so that we can take some money off the table on risky assets and move towards fixed income.”

With retail and professional investors avoiding U.S. equities, corporate buybacks have become one of the few remaining market supports. For example, Bank of America’s corporate clients purchased nearly $16 billion of shares on a net basis as of early March. However, analysts have observed a deceleration in the pace of corporate buybacks since the year’s beginning.

Closing Thoughts

Uncertainty surrounding U.S. stocks has prompted many individuals to favor cash and cash equivalents. As a result, options such as high-yield savings accounts, money-market funds, and short-term government bonds now offer attractive yields that have been scarce in recent years.

The Investment Company Institute (ICI) reported a record level of assets in U.S. retail money-market funds last week. The first quarter of 2023 saw the largest inflow in ICI history, dating back to at least 2007.

A marked decrease in Tesla Inc. stock purchases further underscores the decline in individual investors’ equity buying. After a surge in Tesla share purchases in February, the pace slowed significantly last month, as Tesla’s investor day fell short of expectations.

JP Buntinx
JP Buntinx has been writing about cryptocurrency since 2012. His interest in crypto, blockchain, fintech, and finance allows him to cover a broad range of different topics.