They say the stock market doesn’t peak until the last bear turns bullish. Bull markets “die on euphoria,” as the late Sir John Templeton used to say.
When it comes to Joe and Joanna Q. Public, it doesn’t look like we are anywhere near that — yet.
Mutual-fund and exchange-traded-fund investors have been selling out of the stock market all through the rally that began last fall, and they are still doing it. They sold another $5.5 billion in stock-market holdings last week, on top of $5.5 billion sold during the month of July, according to the Investment Company Institute, the fund industry’s trade association.
In total they’ve cashed out $102 billion so far this year, and $181 billion since the rally began last October.
Predictably, they were buying during the boom in 2021 and into 2022. They only started selling out of stocks again in the spring of 2022, when the bear market had really taken hold. And they’ve carried on doing so.
It’s the usual story. People typically buy and sell at the wrong times.
The numbers are in contrast with the story line that pops up in the media every so often, that the market is euphoric or in a dangerous mania.
Much of this is driven by sentiment regarding the hottest stocks, notably Tesla
Vandatrack, a company that monitors the purchases of individual stocks and of ETFs, has reported surges of retail buying at points during the year, including early July, though much of it was concentrated in the most popular names.
The American Association of Individual Investors’ “sentiment survey” continues to show ominously high levels of optimism, but those are just opinions — about which there is a well-known saying.
The overall numbers regarding the public as a whole are obscured by a massive long-term shift that is under way among individual investors. For years now they have been selling out of higher-fee traditional mutual funds and moving money into lower-cost exchange-traded funds. Only the combined numbers, showing what’s happening across both types of funds, captures the full picture of what fund investors are doing with their money. And they in turn do not include purchases of individual names.
While investors have been selling the rally in stocks, the same isn’t true for bonds. The public is back pouring money into bond funds aggressively, investing $37 billion just in July and $160 billion so far this year. That nearly reverses the $225 billion they pulled out of bond funds during last year’s rout.
Buy high, sell low — the usual.
If the public is still holding off on buying stock funds, it suggests the stock market’s rise has further to go.
We will get numbers next week from BofA Securities regarding what the big institutional investors are doing. They, too, have been holding aloof from stocks and maintaining bigger than usual cash balances.
It isn’t a certainty that these people will all turn bullish and start pouring money back into the market just before it turns south again. But that’s the way to bet.