Equity investing still on track

Individual investors bought a record number of single stocks and ETFs during the first quarter of 2023, with an aggregate net of $77.7 billion going through US exchanges, according to Vanda Research data, which excludes people’s own contribution to 401(k)s and other retirement accounts. This shows that individual investors still have risk appetite for stocks, continuing the post-Covid trend at around 5x the average seen between 2015-2020.

During Covid-19, stimulus checks by the Federal Government were key in boosting retail demand for equities. The wide and raging rally in risk assets that ensued in 2020 and 2021 meant that most investors had positive returns and were lured by excess confidence to invest more on their own. As the stimulus checks stopped, investors continued to do so.

2022 nevertheless was the year of reckoning. With the vast majority of asset classes being beaten down in double digit losses, Vanda Research estimates that the average individual investor portfolio is down 27% since its peak in November 2021. Naturally, individuals started becoming more passive in their approach, selecting market ETFs or money market funds for their portfolios. Charles Schwab added a net $132b in assets in the first quarter 2023, yet daily average trades fell 10% from a year earlier.

Marketwise, individual investors’ involvement in index and other passive ETFs means that the market has a natural put in its performance. Despite fearmongering about a recession coming, people employing capital in an aggressive manner obliges ETF providers to buy the ETF’s constituents across the board pushing demand for stocks higher. At the same time, any sell-off is exacerbated as retail investors panic more easily and is carried out in an umbrella manner, without really distinguishing between stocks. A valid and recent example is the selling off in bank stocks en masse, with minimal distinction between cheap and expensive.

There is also another implication for investors across the globe. They seem to have become accustomed to both volatility and more aware of differentiation between assets. For some, especially millennials, 2022 is the only global and wide sell-off they have experienced in assets as diverse as crypto, real estate, bonds and stocks. It was therefore a wake-up call as to the normal workings of financial markets – a tough lesson that perhaps had to be learnt.

Savvas Savva

Chief Investment Officer, Equine Capital Partners

This article is a general communication and is educational in nature; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy.