It's been a rollercoaster year for stocks. The S&P 500 is down more than 20% year-to-date and 2022 is likely to end up as the sixth-most volatile year since the Great Depression.
But not all traders are on the same ride — the large, institutional investors on Wall Street have shuffled away from markets while Main Street's retail investors are still strapped in.
What's happening: It hasn't been a great year for investors — global equity markets are contending with sky-high inflation, elevated interest rates and slowing economic growth. But despite this year's lackluster market, investors bought $800 billion of Exchange Traded Funds which are baskets of stocks typically purchased by retail investors. That's the second most on record, according to Bank of America's Jared Woodard.
Hedge funds and other institutional investors, meanwhile, have been heading for the exits and selling their stocks — preferring to hold on to cash instead.
Goldman Sachs reports that funds increased their cash holdings to around 2.5% of their total portfolios this fall. That's a full percentage point higher than where it was at the end of last year and the highest level since the beginning of 2020.
At the end of November, institutional investors' portfolios were about $375 billion lighter in equities than they were at the end of 2021, according to data from S&P Global Market Intelligence. Retail investors, meanwhile, acquired $4.3 billion more in equities over the same period.
The S&P 500 is heading toward its worst year in a decade. However, Main Street is holding on to its stocks while Wall Street is running for the hills.
What explains the divergence? It depends on who you ask.
One simple explanation is that institutional investors are responsible for vast amounts of money that belong to other people. They have to answer to a board and they're generally more risk-averse than individual investors who only have to answer to themselves. When markets move downward, it's usually institutions who that move quickly out of equities while retail investors prefer to play the long game.
But those working in finance may tell another story. "Respect, for retail investors, is in short supply," wrote Azalea Micottis at Informa Financial Intelligence, in a recent note. "For many finance professionals, they are the fools in the market, rushing lemming-like into meme stocks and assets coming off their peaks."
That could be the case here, but an analysis by Micottis found that retail investors have actually done a better job at predicting the future direction of markets than institutional investors have since 2016.
Still, things aren't looking great this year.
The average active retail investor's portfolio is down around 30%, or $350 billion in total value, according to data compiled by Vanda Research. That's a lot worse than the S&P 500. Tesla's downfall wiped out about $78 billion for retail traders alone, according to Vanda. JPMorgan analysts predict things will only get worse. They say retail investors will likely end the year down 38%.
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