Retail investors are sitting out the stock resurgence

This year’s stock rally is back on course, but not everyone is on board.

The S&P 500 index in November notched its best monthly performance this year, snapping a three-month streak of steep losses as Wall Street became optimistic that the Federal Reserve is done raising interest rates. The revival in stocks, though off to a bumpy start in December, has been broad in reach, pulling up shares of everything from small caps to cyclical stocks.

Among the chief catalysts for the rally are swooning US Treasury yields. The yield on the 10-year US Treasury note fell to 4.12% on Wednesday, well below the 5% it topped in late October, according to Tradeweb.

The glut of cash on the sidelines is “poised to fuel a significant rally in risk assets, offering investors an opportunity to potentially capitalize on improved sentiment and market dynamics,” wrote Seema Shah, chief global strategist at Principal Asset Management, in a note on Monday.

But analysts say that retail traders aren’t jumping into the stock market and might not anytime soon. Cash is still king for many.

The TD Ameritrade Investor Movement index for November, a measure of retail investor sentiment, revealed that the company’s clients were net sellers of stocks last month despite the market’s recovery. The index also recorded its lowest monthly reading since May.

“A lot of retail investors are just happy to not participate right now,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

There is a record $5.84 trillion parked in money market funds as of November 29, according to Investment Company Institute data. About $2.25 trillion of that cash is in retail money market funds.

While institutional investors are starting to pick at stocks poised to do well if the economy reaccelerates — explaining the rally’s widening breadth — retail traders are taking a more conservative approach, especially after seeing steep declines in their portfolios during last year’s sell-off, says Mulberry.

Plus, yields are still at attractive levels compared to recent years, when low interest rates meant that cash offered little return for investors.

Staying out of the stock market action and betting instead on fixed income is paying off for investors. The Bloomberg US Aggregate bond index, a widely-tracked benchmark for the performance of US investment-grade bonds, logged a 4.5% return in November. That’s the index’s best monthly performance since 1985.

“Next year, [we’re] looking at a lot of uncertainty and volatility,” including the Fed’s rate trajectory and concerns about a possible recession, said Mulberry. “I think a lot of retail investors will just continue to sit on the sidelines.”



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