Retail Kept Summer Trading Hot

This year has proven tough for investors in bonds and stocks alike. Stocks are in bear market territory, and many bond funds have fallen around 20%, too, as rates have risen. 

With today’s update to retail trading, we see that rates are driving stock selection, but the bear market doesn’t seem to have had much impact on gross trading activity. 

Gross trading holding up 

Despite the selloff, market-wide value traded is up 6.8% since last year, from $564 billion to $602 billion per day (Chart 1, blue line). Shares traded (ADV) remain well above pre-Covid levels, at 12.1 billion shares per day (vs. 11.4 billion shares per day in 2021). 

Interestingly, the market slowed down a little this past summer, trading “just” to 10.6 billion shares per day in July and August, 17% lower than the first six months of the year. This slowdown occurred amid recession concerns following negative Q1 and Q2 GDP data, along with rising initial claims for unemployment, which could have led to some risk-off positioning from investors. However, retail activity remained strong during summer, trading around 1 billion shares per day consistently each month this year. 

That’s consistent with our measure of retail trading, which shows that, despite a slow-ish summer for the market (Chart 1, blue line), retail remained active (Chart 1, green area), with daily value traded holding around $36 billion per day. 

Chart 1: Retail and market activity has remained elevated since Covid started 

Return of retail net stock buying 

Looking at data by ticker, we see that ETFs remained 29.2% of all retail value traded and have seen net buying year to date of almost $97 billion. In contrast, net flows in stocks are close to flat, as the data in Chart 2 shows. 

Looking at changes to sector flows on a monthly basis, we see that retail stock trading has been significantly affected by the market. As the market sold off, retail increasingly sold tech sector positions, peaking with nearly $5 billion in net selling in May. The market bottomed (Chart 2, green line), and 10-year rates hit a high (at the time) of 3.48% in June. 

Then, as fears of a recession crept into the market, the market expected inflation to fall, helping keep a cap on rates. The 10-year yield fell as low as 2.6%, and the market recovered. Retail investors in July and August became net buyers across almost all sectors. 

Chart 2: Monthly net retail flows by sector

However, the latest data shows that inflation remains more entrenched than expected, and the labor market remains tight, helping push wages higher. That’s pushed the Fed to reinforce its commitment to an aggressive stance on fighting inflation – which has caused rates to rise again, peaking at 4.0% in the past week. As rates rose, stocks again fell (green line). And as stocks fell, retail again became net sellers of companies across almost all sectors.  

ETF flows show the TINA trade is over 

It should be no surprise, now that bond yields are rising, that the TINA trade (“There Is No Alternative” to stocks) is over. ETF flows by asset class seem to confirm that’s true. Data in Chart 3 shows that bond ETFs have seen persistent inflows across most durations. However, the largest shifts appear to be in broad maturity bond ETFs, which switched from net selling in Q2 to net buying in Q3. 

Interestingly, the only bond ETFs reporting net selling in Q3 are ultra-short term, which represents ETFs holding bills with maturities mostly around three months. That may be a rotation into longer-term bonds, some of which have sold off 20% or more so far this year. 

But there’s been a shift in the last week as markets responded to the Fed doubling down on its commitment to fight inflation, alongside spillover effects from the budget-related bond selloff in the U.K. We’ve seen yields rise across the yield curve and some investors moving into cash. 

Chart 3: Bond ETF daily retail flows have turned positive 

What stocks are retail investors most active in? 

Looking at gross value traded by ticker, we can see which stocks have been the most active across retail. 

We see retail like to trade a number of the most popular ETFs, like SPY and QQQ. However, six of the top 10 tickers traded (by gross value) are companies, all of which many would consider “tech” companies. 

Interestingly nine of the top 10 stocks for retail trading are also Nasdaq listed! 

Until recently, most of these stocks had actually been net to buy. But, as “growth” stocks, these companies are more sensitive to higher rates, so with the increase in rates recently, now half of them are net to sell this quarter. These results also show that retail trading, even in popular company stocks, is actually reasonably balanced, with net buying or selling representing an average of less than 1.6% of their gross trading. 

Table 1: Top 10 stocks by gross retail value traded in Q3 

Retail kept summer hot 

Although lots of professional investors look like they took vacations this summer, there isn’t a lot of evidence in our Data Link data that retail did. In fact (despite some net selling), retail might have kept summer volumes hot. 

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US Markets

Phil Mackintosh

Nasdaq

Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

Read Phil's Bio