A lot has happened in rates markets in the past two months, even though the Federal Reserve has put rate hikes on pause (chart below, red line).
We’ve seen the 10-year Treasury yields rise as much as 120 basis points to 5% (green line), almost equaling the 2-year rates. Reasons why range from concerns about the Fed leaving rates higher for longer, supply-demand imbalances in the Treasury market due to QT and re-funding by the Treasury after the near government shutdown to pricing of U.S. credit risk as government debt keeps piling up.
Then, in just a couple weeks, they fell 50 basis points to 4.5%, this time because a rash of weaker-than-expected economic data solidified market expectations the Fed was done hiking rates.
Chart 1: Although the Fed has paused rate hikes, the 10-year rates spiked to almost 5%
If we look at the past nine bear markets over the last 60 years, we see that six resulted in recessions (red line), and three saw soft landings (blue line). Until early September 2023, the current cycle (black line) had been tracking past soft landings.
But the recent run-up in rates saw stocks fall. Investors became concerned that higher rates for (much) longer increased the costs of refinancing corporate debt, reduced future profitability, and added to the odds of recession. As rates have come off their highs, stocks have increased, almost splitting the difference between the soft landing and recession paths.
Chart 2: Markets had been pricing in a soft landing until 10-year rates spiked
With that in mind, we update how retail traders have responded, looking at flows based on data from Nasdaq Data Link.
Gross retail trading holding up
The data at the right edge of the chart below shows retail (green) and market-wide (blue line) liquidity ticked up as the market sold off:
- Daily retail trading remains at just over $34 billion per day since the start of Q4, which is still well above the pre-Covid levels.
- Market-wide value traded also recovered slightly (blue line below) to about $530 billion per day in Q4.
Chart 3: Gross retail trading value remains above pre-covid levels (market-wide trading in blue, right axis)
Retail selling in corporates slowing down
Despite the market sell-off, retail flows in corporate stocks have moderated, with net selling at a single stock level more muted than most months this year and net positive in October and November.
Most of the retail net buying since the start of October has been concentrated in Consumer Discretionary and Information Technology names. Similar to the activity we observed in June, net buying in Consumer Discretionary was predominantly in TSLA, which made up just over $1 billion in retail net buying compared to $1.6 billion in net retail buying across the whole sector.
We also see five straight months of retail buying in Information Technology stocks. However, the scale of recent retail buying in IT stocks has yet to match the net selling observed at the start of the year, leaving retail still net sellers of the sector by about $2.8 billion since the start of the year.
Chart 4: Net stock flows by month and sector (line shows SPY price)
Retail trades corporates more than ETFs
The breakdown of gross trading between ETFs and stocks has shifted slightly to stocks. Retail gross trading in stocks adds around $25 billion in daily liquidity, while ETF trading has ticked up to about $10 billion per day.
However, that leaves the ratio of stock to ETP trading at just over 2:1, which remains near multi-year lows (grey zone).
Chart 5: Gross ETFs and stocks
Gross retail ETF trading, at $10 billion each day, remains a fraction of total ETF liquidity. Market-wide ETF trading adds to around $178 billion per day since the start of October, a gross trade (buys + sells) of around $356 billion per day.
But retail have net bought ETFs consistently
We still see retail investors consistently buying ETFs. In fact:
- There have been only three days so far this year with net selling of ETFs. On an average day, retail net buys around $359 million of ETFs across multiple asset classes and regional exposures.
- In contrast, for corporates, around 60% of dates see retail net selling.
Adding this up over the whole year, we see retail net buying of $61 billion, with $76 billion into ETFs, making stocks a $15 billion net sell.
Chart 6: Net ETFs and stocks
Retail continues to add liquidity to U.S. markets and assets to U.S. ETFs
Following a more normal summer slowdown across the market and retail trading, data suggests retail remains active in the U.S. stock market and is still well above pre-Covid levels.
Based on our metrics, Retail trades around $35 billion each day, a material contribution to the $530 billion of total market liquidity. They’re also still net buyers of the market – although mainly through U.S.-listed ETFs.
