We know systematics — pejoratively “the machines,” accurately, and in order of speed, CTAs, target vol and risk parity — de-leveraged and de-risked into, around and through the vol event that crescendoed this week in a generational crash for Japanese equities and a historic intraday jump for the VIX.

But what about “investors” in general and in aggregate? After all, some folks bought the dip. Or at least that’s the impression one gets from the flows data. Stock-focused ETFs and mutual funds saw inflows over the latest weekly reporting period, according to EPFR. That runs counter to the August seasonality.

In addition to buying US stock funds on net, investors saw — or thought they saw — an opportunity in the worst rout for the Nikkei and Topix since 1987. The $4 billion net inflow to funds focused on Japanese equities was the third-largest of the year. Note that the Nikkei escaped the week with only a modest decline under the circumstances. The same with the Topix.

As discussed here briefly first thing Friday morning, inflows to stock funds remain uninterrupted. It’s been 16 weeks in a row.

You’re reminded that inflows to equity funds in H1 were among the strongest ever. Most observers expected those flows to abate this month, and potentially reverse. Maybe they still will. But for now it’s “diamond hands,” to channel the meme/crypto crowd.

(As a quick aside, you’re always encouraged to note that this data is net flows. The breakdown reflects the ongoing active-to-passive shift. For example, the $340.7 billion that’s gone into stock funds this year globally is split between $590 billion to ETFs and nearly $250 billion from mutual funds.)

Anyway, to the question at hand — i.e., what impact, through the price channel, the re-allocation channel or both — did recent turmoil have on overall equity allocations? The answer, according to JPMorgan’s most comprehensive measure, is “not much.”

The figure above shows the implied global, non-bank investor stock allocation. It moved perceptibly lower (annotation) in recent days, but the shift hardly counts as seismic.

Note that equity allocations remain well above the post-2015 average, a meaningful threshold, according to Nikolaos Panigirtzoglou. “The average post-2015 in our opinion is more relevant as it captures the ‘new equity culture’ that emerged among households over the past decade due to zero commission trading and access to leverage,” he said, adding that although there has, in fact, “been significant retrenchment in equity allocations in recent weeks” due both to falling prices and an increase in allocations to rallying bonds, at nearly 47%, the current equity allocation “remains significantly above post-2015 average levels.”

That raises an obvious follow-up question: What would it mean if the equity allocation fell to that post-2015 average? Mathematically it’d suggest another 8% lower for stocks. Panigirtzoglou went on to say that at the trough for equities in October of 2022 and then again at the local lows reached in October 0f 2023, the global allocation to equities implied by JPMorgan’s methodology fell below that post-2015 average.

Commenting further, Panigirtzoglou said that based on a variety of simple metrics JPMorgan watches, “retail investors’ retrenchment has been rather limited so far compared to previous equity market corrections.”

That’s not to say retail sentiment didn’t take a hit. It did. The bear share of the AAII survey jumped sharply and the Bull-Bear spread dropped to the lowest since April’s pullback.

37.5% on the bear side was the highest reading of 2024 and as the figure shows, the MoM jump was the most pronounced since November of 2022.

Coming full circle, this was by and large a vol event and a carry / momentum unwind, exacerbated meaningfully in the US equities vol complex by a convexity crunch/spiral. The bulk of the de-leveraging appears to have been concentrated in yen-linked trades, CTAs, sundry target vol strats and perhaps risk parity, although that’s a slow-moving train and the rally on the rates side would’ve presumably helped cushion the blow, perhaps forestalling any de-risking.

Where does this leave us? Well, I’m not sure, really. Not about the macro, and therefore not about monetary policy. But from a technical perspective, Nomura’s Charlie McElligott reminded investors on Friday afternoon that “vol tends to mean revert in the absence of sustained big moves.” “As more vol-sellers reappear and spot dip-buyers emerge, dealers will get long gamma again, realized vols will re-compress with trading ranges, and away we’ll go,” he wrote.