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Retail investors have missed the rally — but that could be bullish

Scott Gamm
Stock trader Gregory Rowe works at the New York Stock Exchange, Friday, May 10, 2019. (AP Photo/Richard Drew)

Investors haven’t participated in 2019’s stock market rebound, but that could be good news for a market facing a fresh bout of volatility.

That’s according to fresh data from Goldman Sachs analysts, led by chief U.S. equity strategist David Kostin.

“Although the S&P 500 (^GSPC) has risen by 15% year-to-date, equity funds have seen net outflows of $35 billion so far this year,” the analysts wrote in a note to clients. “U.S. active mutual fund outflows of $70 billion have more than offset $35 billion of inflows into U.S. passive mutual funds and ETFs. There have been only two other instances during the past 15 years (2009 and 2012) when the S&P 500 rose by more than 10% during a four-month period despite equity fund outflows of more than $20 billion.”

You can’t blame investors for being wary of the stock market in 2019. From September 20 to December 24, 2018, the S&P 500 fell 19.8%, flirting with bear market territory. A move like that doesn’t exactly instill confidence in the stock market.

Still, the rebound in stocks for 2019 may encourage retail investors to finally pull the trigger and buy stocks, even though they missed a 15% move higher.

“History shows that retail sentiment tends to trail equity market performance. This explains that retail investors have been net sellers year-to-date because of the market decline during fourth quarter,” the analysts said. “Assuming no imminent downturn in equity prices, the strong year-to-date return means retail investors will likely buy stocks in the second half.”

The investors buying stocks so far this year have been on the corporate side — that is, the companies themselves.

“High frequency data from the Goldman Sachs Corporate Trading Desk indicate share repurchase executions have climbed 26% year/year, including a surge this week alongside the equity market decline of 2%,” the analysts wrote.

If retail buying in stocks rebounds, that could provide another wave of bullishness for the stock market, which is facing new volatility amid another escalation of trade tensions between the U.S. and China.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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