The much-vaunted stimulus-driven boom in stock trading is turning out to be something of a bust.
With the major averages steadily setting records, individual investors still appear to be pouring money into equities. But it appears they’re now investing in traditional mutual funds and exchange-traded funds. At the same time, they have slowed their previous manic buying of single stocks that sent once-obscure names such as GameStop (ticker: GME) soaring earlier in the year.
According to a new report from J.P. Morgan’s global market strategy team, some of the most recent federal stimulus checks might have been deployed into funds rather than into individual stocks or options, as had been the case for much of the past year. Individual investors appear to be reverting to their prepandemic practice of buying funds.
A month ago, this column highlighted research from Deutsche Bank that found younger recipients of the $1,400 payments from Uncle Sam planned to put as much as half of the checks into stocks. The New York Times noted the same data more than two weeks later, which, as it turns out, was just after individual investors’ trading activity appeared to peak, according to the J.P. Morgan report lead-authored by Nikolaos Panigirtzgolou.
While fund buying has been strong, small trades in call options (10 contracts or less) have fallen off sharply from their peak in January, according to Options Clearing data cited by the bank. At the same time, a basket of stocks favored on retail trading platforms such as Robinhood has been moving sideways overall while the S&P 500 has continued to rise to records.
Meanwhile, retail flows into U.S. equities and exchange-traded funds have fallen to a five-day average of $380 million, based on estimates from J.P. Morgan’s global quantitative and derivatives strategy team. That’s down from the peak of $670 million a day in the five days ended March 16, but still above the 12-month daily average of $250 million.
This marks a switch back to individuals’ preference to their prepandemic buying of traditional equity funds from single stocks and options. Stock ETFs drew $199 billion in the first quarter, compared with $231.8 billion for all of 2020, according to Morningstar.
Why the switch back from stocks to funds? Here are a few guesses. Americans are getting back to work, as evidenced by the 916,000 jump in nonfarm payrolls in March reported last week. That would leave people with less time to play the market but still wanting to invest via ETFs. Or maybe some of them got caught up in their brackets for NCAA basketball March Madness. Or perhaps some saw their previous gains slip away as the favorite meme stocks rolled over.
Whatever avenue they took, U.S. investors are fully invested in the stock market based on several other indicators cited by the bank. Equity holdings of hybrid mutual funds have rebounded to over 60%, in line with highs at previous market peaks in 2018, 2007, and 2000. U.S. households’ equity allocations of their financial assets are also at a record, according to the latest Federal Reserve data, topping the 2000 dot-com era peak. Meanwhile, net margin debt also is elevated by historical standards.
Taking into account those three factors, “there appears clear evidence of elevated equity positioning by retail investors and thus a vulnerability for the equity market going forward,” the report said. When the public is all-in, that’s a signal for contrarians to take some chips off the table.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
