Are Retail Investors Driving the Stock Selloff?

Over the past two years, retail has become a bigger, more important part of the U.S. stock market. Data suggests they have been consistent buyers, accumulating more than $303 billion of stocks since Covid started, with $214 billion of that in exchange-traded funds (ETFs).

But the market selloff in 2022 has been a quick introduction to risk and volatility in stocks. As we noted last week, with the S&P 500 falling as much as 20% from its highs recently, it ranks as the second-worst start to any year since the Great Depression. Small cap has fallen even more.

Chart 1: Market performance year to date

This raises an interesting question: As returns turn negative, have retail investors stopped liking stocks?

Using Nasdaq’s U.S. Retail Equity Flows (UREF) data, which we first discussed last year, we look at what the most recent data shows. It turns out that in May, retail were still buyers (just thanks to ETFs), and are still pretty active traders.

Retail is still active

Looking at the gross levels of activity (buying + selling), we see that retail has remained active during the recent volatility—at least for the segment of retail trading that we capture—trading an average of $40 billion per day in May, slightly above average.

That’s in line with market-wide volumes (green bars), which have also increased slightly to around $600 billion per day.

Chart 2: Retail average daily $ value has maintained at typical post-Covid levels

We can also see that retail activity remains well above the pre-Covid “normal,” with a slow day touching $30 billion, well above the old pre-Covid average below $20 billion per day.

Although, according to Rosenblatt, other indicators of retail activity have fallen from MEME stock highs. For example, wholesalers share of all shares traded has fallen by 7.2% (to 16.9%), and off exchange has also fallen by 8.2% (to 42.2%).

Retail has turned sellers (of stocks)

If we look at net selling (buying – selling) we see a shift in sentiment during May’s selloff.

In reality, retail was a net buyer for the month, but only just. That is thanks mostly to ETF flows, which remain overwhelmingly positive even on days with strong negative returns.

Corporate stocks were net to sell for 16 of the first 19 days in May (to May 26), enough to drag overall retail flows to a net sell on seven days.

Although we saw a similar pattern in April, with 11 days of corporate selling in the month, the largest daily drawdowns were less than $500 million, much less than the $1 billion in selling seen a number of times in May.

Chart 3: Net retail flows (daily) in stocks and ETFs

Retail is only 5% of daily ETF trading

We know from other research that retail has been increasing as a percentage of the overall market.

We also see their consistent buying of ETFs, adding to more than 70% of all net buying since Covid started, a total of $214 billion.

However, ETFs are also very liquid. All ETFs trade more than $200 billion per day. So even though retail trade a lot of ETFs, their trading this year adds to just under 5% of total trading in ETFs.

Chart 4: On average, retail only makes up 5% of the market-wide value of ETP trading

That seems to show that other users of ETFs are very active traders. We know from 13F’s that mutual funds tend to hold and trade ETFs infrequently. However, ETFs offer cheap and liquid exposure to multiple investment styles and asset classes. That makes them attractive for hedge funds building long and short positions, as well as principal trading desks at brokers, who need to hedge their trading positions.

However, because institutional traders are active traders, they also tend to focus on the most liquid ETFs, which accounts for the fact that the top 20 ETFs account for around 50% of all ETF value traded.

Retail is most bearish on tech and healthcare

Given retail has turned net sellers of corporates, it is also interesting to look at what sectors they are selling the most. What we see is:

• Technology stocks have gone from a net buy to an increasingly large net sell each month throughout 2022.
• Healthcare has a similar trend but on a much smaller scale.
• Consumer discretionary and Financial sector stocks have been among the strongest to buy so far this year, although in May, even they turned slightly negative.
• Energy, the best performing sector this year, has seen mostly inflows, even in May. However, March saw outflows, right after the start of the Ukraine war, on the back of shortage fears where oil hit its 2022 highs, over $123 per barrel, before falling back toward $100 later in the month.

Chart 5: Monthly sector stock flows year to date

No evidence that retail interest in investing is fading yet

The latest economic data shows the consumer remains strong, and jobs are plentiful.

The evidence from our retail trading trackers suggests that although retail confidence took a hit in May, activity levels remain well above pre-Covid levels, and net selling was limited to specific dates and mostly tech stocks.

Importantly, retail accounted for little of the overall selling in May. In fact, most of these new investors seem to be investing for the long term, and as other data show, that’s good for U.S. households.

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Phil Mackintosh

Nasdaq

Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

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