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The tide turned on U.S. stocks this week, with the S&P 500 notching its worst week since March.

We’ve felt the ground shifting underneath us for a few weeks, though. After the S&P 500’s best rally since the Great Depression, stocks have stalled over the past month. Individual investors (including Ally Invest customers) are still buying, and actions speak louder than words. But the average investor’s sentiment is turning cautious, and professional investors are stepping out of the market.

The last time we saw this much anxiety from both groups was July 2008.
Here are a few tidbits we’ve noticed, starting with the clearest lens we have into investors’ trading patterns – our own customers.

 

The chart shows the pace of buying for Ally Invest customers from Jan 1, 2020 to May 13, 2020 and indicates an increase in buying volume from Feb 20 to March 23, followed by a decline from March 24 to May 13.

Ally Invest Customers: Buying Fatigue

Our customers have been enthusiastic stock buyers for the past several weeks. For context, Ally Invest’s account base tilts younger — about 43% of our customers are millennials, while 34% are Gen X. Millennials on our platform have led the bullish charge, with 68% of their trades being buys since March 23, compared to 60% for all of 2019.

However, buying fatigue may be setting in. Over the past five days, our customers’ stock buying has noticeably slowed since the mid-March trend. On the day the April jobs report was released, the S&P 500 jumped 1.7%, but customers’ buys were just 57% of trades, nearly the lowest proportion of buys we’ve seen for any day in 2020. Stock prices dropping this week did entice some buyers back in, but purchasing activity remains relatively muted.

Customers who are still buying are picking up beaten-down stocks, instead of equities that have led the market on the way up. Since March 23, the most bought stocks have been Delta Air Lines Inc., Boeing Co., and American Airlines Group Inc. – all stocks that made new 52-week lows this week.

All told, while Ally Invest customers are more cautious than they have been in weeks, many are still buying stocks, especially those that they perceive as offering value.

 

The chart shows the most-bought securities amoung Ally Invest customers from May 7 - May 13 2020 and how far they have declined from the 52-week high. The rankings are as follows: #1 - Delta Airlines (DAL) -69%, #2 General Electric Co (GE) -57%, #3 Wells Fargo & Co (WFC) -56%, #4 Tesla (TSLA) -17%, #5 Boeing (BA) -69%, #6 American Airlines Group Inc (AAL) -74%, #7 United Airlines (UAL) -79%, #8 Carnival Corp (CCL) -77%, #9 Ford Motor Corp -54% and VectolQ Acquisition Corp(VTIQ) -27%.

Individual Investors: Feeling Bearish

Individual investors outside of our platform appear more downbeat about the market outlook, according to a few indicators we watch.

One of those is fund flows, which show investors continuing to pull money out of mutual funds and exchange-traded funds (ETFs) at the same pace they did during the selloff. Investors have withdrawn about $28.6 billion from domestic equity mutual funds and ETFs in the two weeks ending May 6, based on Investment Company Institute data. That’s the third-biggest outflow this year, behind the two weeks ending March 4 and March 25.

Skeptics are also coming out of the woodwork. Bearish sentiment (which measures expectations for the market to decline) is near its highest in seven years, according to the American Association of Individual Investors’ (AAII) weekly survey. The AAII bears aren’t always prescient (and sometimes, they’re dead wrong), but they’re a good window into how more novice investors are viewing market prospects.

Institutional Investors: Sitting It Out

Professional investors, the folks making high-dollar trades, are largely more valuable to track, albeit more difficult to follow because they keep their thoughts closer to the chest. However, there are a few indicators we can watch for “smart money” sentiment.

Investors who are speculating in S&P 500 futures (a largely institutional market) are indicating they’re overwhelmingly expecting another fall in stocks, as they are short the most contracts since October 2015 (according to CFTC data). This development is especially noteworthy when you consider short positioning in S&P 500 futures correctly timed the 2007 to 2009 bear market. Short positions reached a high in September 2007, right before U.S. stocks peaked. In July 2008, both S&P 500 futures shorts and AAII bears reached highs before the S&P 500 took a second plunge.

Fund managers are also sitting on the most cash in their portfolios since 2001, according to a Bank of America survey from April, and well-known investors have turned bearish. This week, David Tepper and Stanley Druckenmiller – two prominent hedge fund managers – issued warnings about stock prices. A few weeks ago, famed investor Warren Buffett said he isn’t buying stocks right now. Talk is cheap, and public comments don’t always reflect actual trades. But when market moguls speak out, the investing world listens.

Destined for a Decline?

Individual and professional investors seem to agree there is downside risk in the market. Professionals have a better track record with sniffing out market direction, and they’re putting more money on downside outcomes than they have in a long time. While individuals remain active buyers on our platform, they’re also showing signs of concern.

It’s hard to say where the market will go from here given historic economic uncertainty. We still think stocks’ long-term prospects are good, and history shows stocks can deliver impressive returns for patient investors, but part of investing is weathering the ups and downs of the market. Based on the cautious lean we’re seeing, there may be more downs than ups in the near-term.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
 


Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.