We talk incessantly (and often derisively) about “the retail investor.” We’re never very precise about who we mean.
Part of the problem is that investors come in all shapes and sizes, and hail from diverse backgrounds such that neat classification is impossible. Some readers are familiar with Kevin Muir, of The Macro Tourist fame. Is he a “retail investor”? Well, it depends on who you’re comparing him to. If the bar is Dan Loeb, then yes, Kevin is a retail investor. If the bar is Reddit-inspired day-traders whose preferred execution platform is Robinhood, then no, Kevin isn’t a retail investor.
Lacking a universal definition, we can’t make claims about retail investors as a group. Or, actually, we can, but we’ll invariably talk past one another, because my definition is different than yours, and yours is different from the next person’s, and so on. That’s why it’s best to ignore mainstream financial media articles about retail investors. They tend to quote multiple sources, but the data never matches because everyone’s classification system is different. That’s why, if you rely on mainstream media outlets, it can often seem as though retail is buying dips and selling en masse during the same week.
The only way to be consistent is to avoid commingling sources or to stick to some reasonably clearcut distinction that separates institutional managers from individual investors, for example.
With that in mind, Goldman’s David Kostin cited the bank’s trading desk in suggesting that retail investors have now sold almost the entirety of the stocks they bought during the pandemic boom. The figure (below) plots an estimate of retail-trader purchases and the relative performance of the bank’s retail favorites basket.
According to Goldman, it’s over, where “it” is the retail mania. Kostin didn’t put it quite that way, but I’m not sure how else to describe the situation.
Notwithstanding a big inflow during the latest weekly reporting period, billions fled US equity ETFs and mutual funds over the preceding several weeks as macro concerns undermined sentiment.
Kostin noted that “a reversal in household equity buying” has accompanied a regime shift from the long-running TINA environment to TARA, “There Are Reasonable Alternatives.” I suppose that depends on your definition of “reasonable.” Besides commodities, nothing has worked in 2022, and you’ll have a very difficult time getting positive risk-adjusted (let alone inflation-adjusted) returns.
The figures (above, from Goldman) give you a more comprehensive look at cross-asset performance than the simpler chart I used in “The Stock Selloff Probably Isn’t Over.”
In any case, the point is just that however you define retail investors, they’ve de-risked. As Kostin wrote, fiscal stimulus and near-zero interest rates have given way to rising rates and recession concerns. And, so, the party’s over.
If you think you might be a retail investor, and you’ve been trimming exposures after losing money, don’t fret. You’re not alone. “Institutional managers have also continued to cut leverage,” Goldman said, adding that aggregate hedge fund net leverage was the lowest in a half-dozen years as of March.
Meanwhile, high-frequency data from Goldman’s Prime desk suggests hedge funds continued to de-lever into the second quarter. On an average, asset-weighted basis, overall equity L/S managers have returned -17% this year, Kostin said.