Memories of post-COVID melt-up haunt anyone selling stocks now

Institutional investors are offloading equities to retail buyers in a traumatized market. While similarities between now and the bottom of the coronavirus crash may end there, memories of how that episode played out are proving hard to shake.

Institutional investors are offloading equities to retail buyers in a traumatized market. While similarities between now and the bottom of the coronavirus crash may end there, memories of how that episode played out are proving hard to shake.

Despite breakneck volatility and harrowing images of war, retail traders just plowed money into the equity market for a ninth straight week, according to Bank of America Corp. client data. That’s a stark contrast to the firm’s hedge fund clients, which last week sold US$4 billion of stocks, the most on record. Same thing on Morgan Stanley’s trading desk, where professional speculators have been cutting equity exposure, alongside relentless buying from amateurs.

Who exactly constitutes the smart money on post-pandemic Wall Street is a point of debate after mom and pop day traders dove into stocks as they were bottoming two years ago. While a single example of prescience doesn’t imply the retail crowd is right this time, the fortunes minted at the bottom of that crash have constituted powerful psychological conditioning during two years of buy-the-dip euphoria.

BofA data shows that S&P 500 returns following periods of big retail inflows have been above average, while the index’s performance is subpar post-retail selling. When compared with the hedge funds’ record, the retail crowd acts as a “slightly better” indicator for future returns.

“This is just an extremely dynamic situation, and if peace breaks out, there’s not going to be enough time to react,” said Peter Mallouk, president of Creative Planning, which has about US$230 billion in assets under management. “It will be as if when we got news of the Fed intervention and how quickly the market recuperated.”