The contrast between professional and amateur investors could not be more stark.
As traders around the globe have frantically unloaded positions in recent weeks, so-called mom and pop retail investors have kept level heads and not sold out of stocks.
In fact, “the typical trader is buying equities on the dips,” passive investment firm Vanguard notes in a research paper, adding that “older, wealthier traders are moving modestly to fixed income.”
Jeffrey Kleintop, chief global investment strategist at Charles Schwab, points out that through the end of last week, passive equity ETFs had seen a net $20 billion in inflows.
“Obviously selling is big among traders, institutions, computer algorithms… but the one stabilizing factor in this market has been individual investors,” he said.
“That has never been true before, and it’s a very unique aspect of this downturn.”
The contrast between professional and amateur investors could not be more stark. As the pros sold out of risky assets like stocks and oil and even safe havens like gold and Treasury bonds, amateur traders were “maintaining a long-term perspective despite the market turmoil,” Vanguard said.
Google Trends data show that throughout the month of March, searches for “how to buy stocks” and “Dow Jones” are soaring.
On the other hand, money market funds, used ostensibly as savings accounts and cash positioning by money managers, saw record inflows each of the past two weeks, rising to the highest level of holdings on record.
Retail traders “buying the dips” is normally a contrarian signal, meaning that it’s time to sell.
Over the past 30 years, like clockwork, retail investors have sold as the market hit its floor and a recovery was underway, and bought when the market was at or near its zenith and began to fall.
Thus far, “US equities continue to run in lockstep with the day-to-day moves of late September/October 2008,” DataTrek Research co-founder Nicholas Colas said in a note.
After October 2008, stocks fell for another four months, piling up 40% of losses before the recently ended bull market began in March 2009.
The key to finding a bottom is a peak in confirmed COVID-19 cases and the beginning of a recovery from the pandemic, Kleintop said.
“Until we get to that peak in new virus cases on a global scale, we just don’t know how deep the downturn is going to be.”