By Phil Mackintosh, Senior Economist, Nasdaq
We wrote last year about Nasdaq’s new U.S. Retail Equity Flows (UREF) data that captures retail trading activity in U.S. markets. It showed that retail activity almost doubled during the pandemic, with strong net buying.
Today we revisit the data to see what retail did as markets weakened in recent weeks.
As markets sold off, retail volumes nearly hit new records
We know U.S. stocks had a rough start to the year, thanks to fear of rate hikes and escalating tensions between Russia and Ukraine that could impact supply chains for energy. From year-end 2021 through Jan. 27, the S&P 500 declined 9.2%, the small-cap Russell 2000 dropped 14.0% and the tech-heavy Nasdaq-100 fell 14.2%. Growth stocks fell more than value stocks, and only one sector had positive returns, energy, spurred by rising prices for oil and gas. Implied volatility nearly doubled, rising from around 16.6 to a high of 31.96.
However, rather than fear of the market causing a withdrawal, our UREF Data shows retail investors became even more active. In fact, they nearly set a new record for gross trading (buying and selling) on Jan. 24, almost exactly a year after the prior record set during the meme stock craze (green bars in Chart 1).
Chart 1: Retail trading volumes have been increasing over the past few months
Retail became sporadic sellers of stocks, but not ETFs
The S&P had been stuck near all-time highs for a while leading into December. Then, as the Fed mused about rate hikes and inflation, the market started to weaken.
Throughout that time, we’ve seen patches of retail selling of stocks that have mostly lasted for less than a week (blue bars in Chart 2). Interestingly, ETFs (yellow bars) remained net buy every single day, albeit at lower levels than usual in the last week of January.
Chart 2: Retail turned sellers of stocks for just a few days at the end of January
As the data shows, in the last week of January, when the S&P hit technical “bear market” levels, down 10% from prior highs, we did see a burst of stronger retail selling. It added to around $1 billion on both Friday, Jan. 21 and Monday, Jan. 24. For historical context, that is more than we saw on any day in December 2021, but less than the over $2 billion in stocks sold on March 17, 2020 – right in the middle of the Covid selloff.
Despite the sporadic selling, retail investors were still net buyers of stocks in January, adding $5 billion to their holdings for the month.
Retail has been selling small cap consistently
The sell-off impacted small-cap stocks much more than large-cap stocks. In contrast to the large-cap index, which reached new highs to start 2022, the small-cap Russell 2000 index began falling from its all-time highs last November. By late January, it had dropped over 20%.
Over that time, retail investors were consistent sellers of small-cap stocks. In fact, they were net sellers of small cap on more than 72% of all dates, compared to large-cap stocks, which saw selling on only 21% of days.
Chart 3: Retail has been much more bearish on small-cap stocks since November
Retail dramatically reduced growth ETF buying in January
Growth stocks also fell more than value stocks in January.
That makes sense when interest rates are rising, as interest rates affect the valuations of stocks. For stocks with earnings that increase years from now (growth), the increase in rates makes those future earnings worth less after interest costs. Whereas stocks with more stable and mature earnings (value) are impacted less. Also, financials, which are typically value stocks, stand to benefit from higher rates as they earn higher interest on their loans.
The UREF data for ETFs shows that before 2022, buying of value and growth ETFs was close to equal at around $20 million each day. However, in 2022 that has shifted significantly, with much lower net buying of growth ETFs, averaging just $8 million per day with some net selling on a few days in January.
Chart 4: Suddenly retail have less interest in growth ETFs
No evidence that retail interest in investing is fading yet
There is evidence that consumer savings are running down, especially for lower-income households, which should trim consumption and investing patterns in 2022. However, there is no evidence in the data to date that retail is losing interest in stock investing. Nor is there much evidence that they contributed to the dramatic sell-offs last week.
Robert Jankiewicz, Research Specialist for Economic Research at Nasdaq, contributed to this article.