Retail to the Rescue?

We’ve all seen how manic the stock market has been lately. A record high in mid-February followed by a slide and abrupt fall into what seemed like oblivion, then a rapid recovery. If you only looked at your investment performance selectively and somehow managed to avoid all news while on an African safari or something, you might wonder what all the hubbub was about.

We’re almost done with the first half of the year and have 2.5% year-to-date from the S&P 500 and 2% from bonds to show for it. That obviously masks a ton of volatility. By its April low the S&P 500 dropped 15% year-to-date before rallying 20% in less than two months – a huge positive reversal, but it could have been much worse.

Still, you might be wondering who was buying while “everybody” (according to the media at the time) seemed to be selling. It turns out that retail investors did much of the buying while institutional investors headed in the opposite direction.

During April the share of daily market transactions by individual retail investors shot to the highest point on record. This is interesting because market data shows that individuals sold stocks aggressively following the big tariff announcements on April 2^nd only to start slowly buying back throughout the rest of the month as concerns abated. I haven’t seen the numbers but this trend mostly continued in May given recent market performance.

But are retail investors getting ahead of themselves and might head for the hills at the first sign of trouble? Stock prices are high again and that means extra short-term downside risk, so while you should always have a long-term perspective, it’s especially true now. I’ve mentioned in other posts how retail investors are considered the “dumb money” by the institutional folks who humbly style themselves as the “smart money”. The two groups are marching to different tunes lately and only time will tell who’s right.

I think one point from the information below is that selling indiscriminately during a market panic and then spending the next few weeks buying back into stocks doesn’t make much sense. Investors would have been better off by doing nothing since markets recovered so quickly, but that’s Monday Morning Quarterbacking. It’s tough out there and sometimes you have to cry uncle. There should be no shame in that.

Anyway, I wanted to share some information that came in yesterday on this topic from JPMorgan and a few snippets from S&P Global. Nothing is actionable here, just some context on what’s been going on in the markets lately.

From S&P Global…

In the first week of April, as President Donald Trump announced higher tariffs on nearly all global trading partners, retail investors sold off more than a net $7.48 billion, and then bought a net $7.32 billion over the following three weeks as they tried to time the market's bottom, according to the latest S&P Global Market Intelligence data. […]

The initial selling, followed by three weeks of buying, tracked the broad movement of the market during April.

From JPMorgan…

The S&P 500 has erased its year-to-date losses, overcoming a nearly 20% drawdown. With it, valuations have vaulted to 21x forward earnings, well above the 30-year average valuation of 17x. Although April may have been the high-water mark for volatility in terms of intensity and magnitude, risks have been mitigated but not eliminated. Earnings growth expectations still sit at an unrealistic 9% y/y for 2025, despite an anticipated slowdown in growth and headwinds from higher tariffs. The 10-year Treasury yield seems to be hugging 4.5% with risks skewed to the upside, while the Fed remains in wait-and-see mode. This is still an environment marked by pervasive uncertainty. So what is driving the rally?

Perhaps the question is not what, but rather who, is driving the rally:

Retail investors – Since the announcement of reciprocal tariffs, retail investors have been virtually undeterred. Retail flows tracked by our investment bank, which include purchase of single stocks within the Russell 3000, options and a comprehensive selection of ETFs, revealed that retail investors bought net $36 billion in March and $40 billion in April – back-to-back records for largest monthly inflows. The share of retail participation in the market notched an all-time high on April 29, comprising 36% of order flow. For comparison, prior to the pandemic, the retail share of the market rarely breached 10%. Buying activity somewhat cooled in May but was still positive. Consumers have long engaged in retail therapy; retail investors appear to be buying the dip with a similar mentality.

Corporate buybacks – Companies have also been buying back stock at a near-record pace; April was the third-highest month for buybacks in well over a decade. As highlighted in the chart below, this is the strongest year-to-date start for buybacks since at least 2013. Not only does this signal that companies are confident in their long-term prospects at these price levels, but also could reflect the confluence of strong cash balances and uncertainty. Companies may have money to spend but are wary of making capital investments given policy uncertainty […]

Retail and corporate investors alike may be supporting the recent rally in markets, but high valuations have reasserted themselves and risks still linger. Therefore, investors should be well diversified and prepared for pockets of volatility throughout the rest of the year. 

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