By Mark Hulbert.
The behavior of retail investors is a good contrarian indicator.
Data from US equity mutual funds and ETFs show that the stock market’s long-term prospects are looking up. Because over the past 12 months, institutional investors have poured more money into US equity funds than retail investors have.
Institutions have a longer investment horizon than the typical retail investor. So on balance, it is encouraging that retail investors not only buy the stocks they are dumping, but invest more.
The chart above summarizes the data, courtesy of EPFR-TrimTabs. In the 12 months to the end of November 2022, institutional investors poured a net $408.6 billion into US equity funds, while the Vanguard Total Stock Market ETF (VTI) lost 11.3% and the Nasdaq Composite Index lost 26.2%. Meanwhile, net income from retail investors, in contrast, came in at $310.1 billion. Institutions showing confidence in equity is a “long-term positive,” EPFR-Trim Tabs analyst Winston Chua said in an email.
It’s important to note that these 12-month totals are not skewed by a higher reading a few months ago. According to EPFR-TrimTabs, in 10 of the last 12 months, institutions were a source of net income. And retail investors have been the source of net inflows in each of the past 12 months.
Retail investors have shorter investment horizons than institutional investors, and are more active. Just as you chase a bull market high, you sell when the market begins to decline.
This is why the behavior of retail investors is a good contrarian indicator: they tend to be bearish at market bottoms and bearish at market tops. Therefore, the net income from institutional investors is not only a big sign in itself, but also the highest income from retail investors since last year.
The conflicting behavior of retail and institutional investors is the source of Warren Buffett’s famous line, “The stock market is a vehicle for transferring money from the impatient to the patient.” We should only worry about the long-term prospects of the stock market when impatient investors themselves lose patience. Fortunately, that is not happening now.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay for audits. He can be reached at [email protected]
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