Retail Is Still Active, but Selling Since Summer

This year has proven tough for investors in bonds and stocks alike.  

Thanks to increasing inflation around the world, central banks have been rapidly raising rates in unison, hiking from near zero (or negative in some cases). That’s caused valuations for stocks and bonds to fall into bear market territory. Looking at the performance of bonds and stocks versus rates (Chart 1) shows the changes in rates have driven most of the performance in bond and stock funds. That’s no surprise, with earnings growth also stalling as the economy slows down and fears of a recession, or at least a slowdown, growing. 

Chart 1: Interest rates have driven negative returns in bond and stock funds in 2022 

The big question on investors’ minds is: Are we at a market bottom yet? 

With the Fed determined to raise rates until inflation falls, there are likely more rate rises to come. That, in turn, could hurt company earnings, both of which will be headwinds for stock valuations. 

However, the 2022 bear market may have already priced in much of the worst news on companies and the economy. Most other recession-driven stock-market selloffs since World War II have been smaller than the selloff we have seen to date (Chart 2). Although selloffs that had larger stock market falls than these one arguably had specific drivers, in this case: 

• Covid caused the steepest slowdown in economic activity, which translated to a steep but short market pullback. 

• The credit crisis was also the longest recession in the post-war period, taking 2.5 years for GDP to recover. 
• The tech bubble selloff was severe, thanks to lofty stock valuations, although the economy had only a mild recession. 
• While the two selloffs in the 1970s were driven by inflation and energy price shocks – which sounds familiar – both occurred at a time when the labor force and GDP were growing at a much faster rate – requiring rates near 20% to tamp inflation. This time around, the 5% peak in rates currently expected is already well above the Fed’s neutral interest rate. 

Chart 2: Comparing 2022 to previous recession-driven selloffs (in the post-war period) 

Gross retail trading holding up 

With all this uncertainty and losses for stock and bond holders in 2022, we might have expected retail activity to contract. However, our measure of retail trading shows that retail has actually increased over the past few weeks (green area in Chart 3), passing $40 billion per day recently, despite lower stock prices. 

That’s consistent with recent data that shows the TRF back at around 43% of total shares traded (ADV) in the past four weeks. 

Chart 3: Retail and market activity has remained elevated since Covid started 

That’s in contrast to market-wide value traded (blue line), which remains materially lower than the $736 billion per day that was trading at the start of 2022 – averaging around $505 billion per day since September. 

Market-wide shares traded (ADV) are still slightly increased in 2022, at 12 billion shares per day (vs. 11.4 billion shares per day in 2021). However, that’s still materially higher than typical levels of around 7 billion shares per day before Covid and commission-free trading. 

Retail has been net sellers of stocks since summer 

Looking at retail trading by ticker, we see that ETFs remained 29.7% of gross retail value traded in 2022. That has added to net buying year to date of over $113 billion.  

In contrast, stocks have seen $14 billion of net outflows so far this year. Much of that stock selling has come as the market has sold off, in April/May and then again in the post-summer period (Chart 4, line shows the S&P 500 ETF price). 

We can also see that the vast majority of stock selling during that period came in the tech sector (orange color), accumulating over $11.3 billion in net selling, out of a total of $21.3 billion in net selling, since the beginning of September. 

Healthcare stocks have been persistently sold this year, although they are seeing much smaller total net outflows. In contrast, the Energy sector, with strong earnings growth, has been persistently a net buy. 

Communications and Consumer stocks have tended to follow the momentum of the month, being net bought when overall flows are positive and net sold when overall stock flows are negative. 

Chart 4: Monthly net retail flows by sector 

Retail is reacting to the market 

Although other data shows that Covid savings are declining, forcing some households to use their credit cards more again, there doesn’t seem to be a slowdown in the level of retail activity as we close out a tough 2022. 

Although we are finally seeing signs of retail selling stocks, overall, their net flows are still positive, thanks to more buying of ETFs than selling in single stocks. 

The good news is that retail investors are still participating in stock markets, earning dividends and helping companies raise cash when needed. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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