They say the stock market doesn’t peak until the last bear turns bullish. Bull markets “die on euphoria,” as the late Sir John Templeton used to say.
The Contrarian Approach of Joe and Joanna Q. Public
When it comes to Joe and Joanna Q. Public, it doesn’t look like we are anywhere near that — yet.
Mutual fund and exchange-traded fund investors have been selling out of the stock market all through the rally that began last fall and they are still doing it. They sold another $5.5 billion worth of stock market funds last week, on top of $5.5 billion sold during the month of July, according to the Investment Company Institute, the fund industry’s trade association.
In total they’ve cashed out $102 billion so far this year, and $181 billion since the rally began last October.
The Perils of Following the Crowd
Predictably they were buying during the boom in 2021 and into 2022. They only started selling out of stocks again in the spring of 2022, when the bear market had really taken hold. And they’ve carried on doing so.
It’s the usual story. People typically buy and sell at the wrong times.
Challenging Popular Narratives
The numbers are in contrast with the story line that pops up in the media every so often, that the market is euphoric or in a dangerous mania.
Much of this is driven by sentiment regarding the hottest stocks, notably Tesla, Nvidia, Apple, Amazon, and Microsoft. Vandatrack, a company which monitors the purchases of individual stocks and of ETFs, has reported surges of retail buying at points during the year, including early July, though much of it was concentrated in the most popular names.
American Investors: Shifting Focus from Stocks to Bonds
The sentiment survey conducted by the American Association of Individual Investors has revealed alarmingly high levels of optimism among investors. However, it is important to consider these opinions in context.
A significant long-term trend is underway among individual investors, leading them to gradually divest from higher-fee traditional mutual funds and redirect their investments towards lower-cost exchange-traded funds (ETFs). To truly grasp the complete picture of investors’ activities, it is essential to examine the combined data, taking into account both types of funds. Additionally, it is important to note that these numbers do not encompass individual stock purchases.
While investors have been selling off stocks amid the ongoing market rally, the bond market tells a different story. The public has been eagerly pouring substantial amounts of money into bond funds, with a staggering $37 billion invested in July alone and a total of $160 billion invested so far this year. This influx almost negates the $225 billion they withdrew from bond funds during last year’s market tumult.
It seems that the age-old adage of “buy high, sell low” is at play here.
If the general public continues to hold back from purchasing stock funds, it may indicate that there is still room for the stock market to rise.
Next week, BofA Securities will release data outlining the actions of major institutional investors. These institutional investors have also refrained from diving heavily into stocks and have maintained larger-than-usual cash reserves.
While it is uncertain whether these investors will suddenly turn bullish and reinvest heavily in the market just before a downturn, it certainly seems like a logical choice.
