During the wildest year for global markets since 2008, individual investors have been doubling down on stocks. Many professionals, on the other hand, appear to have bailed out.
U.S. equity mutual and exchange-traded funds, which are popular among individual investors, have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.
Hedge funds, meanwhile, have been paring how much risk they are taking in stocks or making outright bets that major U.S. indexes will tumble. Mutual funds have increased their cash positions to about 2.5% of their portfolios this fall, up from around 1.5% at the end of last year and the highest level since early 2020, according to Goldman Sachs Group Inc.
Ben Snider,
a managing director at Goldman Sachs, said institutional and individual investors often dump stocks in tandem when the economy is slowing and indexes are tumbling. That doesn’t appear to have happened this year, despite the S&P 500’s decline.
“The fact that you have not seen very much selling from households is surprising,” Mr. Snider said.
U.S. households typically sell about $10 billion in stocks after the S&P 500 falls at least 10% from its peak. Investors yanked money from stock funds in 2015 and 2018, the last times the index suffered annual losses, EPFR data show.
The S&P 500 is on pace for its worst year in more than a decade, marked by volatility that continued last week when the Federal Reserve and central banks around the globe kept raising interest rates.
In the coming days, fresh data on housing and consumer spending will provide more clues on the health of U.S. consumers and how the Federal Reserve’s interest rate increases are rippling through the economy.
Brian Wilkinson,
60 years old, said he has seen worse in the markets. He witnessed the 1987 stock-market crash, remained invested after the attacks of Sept. 11, 2001, and rode out the 2008 financial crisis. The market always bounced back.
With inflation high, he still thinks he has a better shot at earning high returns from stocks than bonds.
Never a big spender on such things as eating out or entertainment, Mr. Wilkinson has continued contributing cash to his church and stashing away money toward retirement funds. This year, he increased his exposure to stocks to roughly 70% of his portfolio. Paying down the mortgage on his home has given Mr. Wilkinson, who lives near Nashville, Tenn., extra firepower to keep investing.
“Stocks are really the only game in town to ultimately beat inflation,” Mr. Wilkinson said.
Still, watching his investments tumble has been trying.
“It’s painful,” Mr. Wilkinson said. But “it’s the mistakes people make in the downturns that hurt people the most.”
Consumers’ resilience has been a buffer of support for the market this year. Despite worries about a recession, the jobs market remains robust and wages have kept ticking higher. Of course, there are signs that trend is turning. Retail sales in November posted their biggest drop in nearly a year, showing that people are spending less on everything from electronics to books.
And the Fed has indicated it isn’t done raising rates.
That is one reason for the pessimism among many institutional investors. Net bearish positions tied to stock futures hit a record high over the summer, according to Deutsche Bank data, a sign that asset managers and hedge funds were bracing for stocks to keep tumbling. Many of those investors appear to have reduced their bearish positions lately, although as of early December, they were far from bullish.
Meanwhile, one measure of how exposed hedge funds are to the stock market—the share of their positions invested in bullish stock positions versus bearish—has fallen to the lowest level since early 2019 among funds tracked by Goldman.
In a note in early December,
Amy Wu Silverman,
a managing director at RBC Capital Markets, said her clients, which include hedge funds and asset managers, were “quite bearish.”
In one sign of how reluctant many are to make bold stock bets, even knowing others across Wall Street were bearish wasn’t enough to entice some to take a contrarian, bullish stance, she said.
That is why some strategists say a big rally through the end of the year would see many institutional investors wrong-footed.
Some were caught off guard in 2020, for example. Stock futures positioning among asset managers and leveraged funds hit a low around mid-June, and the S&P 500 went on to rally about 8% over the next two months and roughly 20% through the end of the year.
For many individuals, such a rally would be welcome after they waded in to buy the dip in stocks for much of the year, only to see shares fall further. The buy-the-dip trade, which rewarded investors handsomely in the decade after the 2008 financial crisis, is on pace for its worst year since 1979, with stocks falling around 0.7% the week after a 1% decline, according to Dow Jones Market Data.
George Feygin,
a lawyer based in Peachtree City, Ga., said he hasn’t changed his strategy this year and has kept adding to his investment accounts each month. In June, he put a chunk of his bonus into a fund tracking the S&P 500.
“I’m buying low, hopefully,” he said.
Write to Gunjan Banerji at gunjan.banerji@wsj.com
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