Retail Investors have NOT been holding the Market Up

Interesting tidbit – it has been assumed that the market is being held up by inflow from retail investors... but maybe not!

Retail Investors are NOT holding the market up

Interesting tidbit – it has been assumed that the market is being held up by inflow from retail investors based on correlation of sentiment indexes and the market both being up, and the belief that retail act on their gut so if sentiment readings are up then they must be flowing funds in.

But apparently not.

Conclusion from view of recent info is that the institutional investors are believing the sentiment measures more than are retail investors.   Three thoughts from the charts below.  First, institutional investor flows seem to be more closely related to the shorter term moves of the sentiment measures that retail.  Second, retail flows have fallen off a cliff recently even as sentiment is up.  Third, looking over the last year where sentiment has trended upward, institutional flows are trending upward while retail is trending down.

What does this tell us?  Not sure.  However, another chart shows that there is a divergence between sentiment (going up) and the real on-the-ground economic measures (flat).   This may be a case of what people say to a survey interviewer and what people actually believe not the same – not the first time.

Stores are not closing and retail chains going bankrupt just because of Amazon.  People aren’t buying as much stuff.  Now we are seeing pullbacks in restaurant chains as well.  Auto sales have been growing on the back of large incentives and opening of credit to iffy credit buyers who are on 5-7 year payment plans even as defaults are up on auto loans.  Is there any wonder that they can’t get sales higher (“even as the average car on the road is 11 years old”).  Does this sound like high sentiment?   

By the way, I have another thought on the 11 year average vehicle age – yes it is longer than the 6 year age my brother told me was the case about 20 years ago, so the talking heads can claim that people SHOULD be buying more cars to replace the aging fleet.   However, the fact is that vehicles can be driven much longer before they begin to self-destruct from parts failure.  30 years ago you needed major work on a car around 100,000 mi, engine rebuilds/replacements between 100k & 200k; today, a car with 100k miles is still young.   

“Now, the New York Times offers the viewpoint that, in terms of cars and mileage,200,000 is the new 100,000. Two numbers make it apparent that 100K is no big thing anymore: The average car on the road is about 11 years old, and the average car is driven about 15,000 miles per year .Mar 20, 2012

200,000 Miles on a Car is the New Norm |

From Goldman:

It is tempting to draw a connection among these facts by concluding that the sentiment of households is translating into the sentiment of retail investors and thus supporting equity markets via strong mutual fund inflows. Indeed, we ourselves assumed such a link between consumer and investor sentiment. But this link does not stand up to scrutiny.

From The Heisman

Exhibit 1 below plots the weekly mutual fund flows from EPFR (for institutional investors and retail investors, respectively) vs weekly data on the Bloomberg Consumer Comfort Index (BCCI).

Splitting mutual fund flows into institutional vs retail reveals that since the election, the institutional component of these flows (Exhibit 1, left) has been more important than the retail component (Exhibit 1, right). This is perhaps not surprising since institutional investors account for roughly three-quarters of the ownership of the EPFR universe of equity mutual funds. But it is more than mere ownership shares, because while institutional inflows amounted to 0.86% of AUM in the week following the election, retail investors were actually sellers. While the market has clearly been rallying on 'animal spirits', it is apparently the professional investors, not the retail money, who have been feeling bulled up.

How about that? Interesting, no?

It appears from the charts that the institutional flows have a closer correlation to the consumer sentiment index while the retail flows lag by a good month

So, now the question – who is the dumb money and who is the smart money? 

God bless you,

Branson Hamilton 

Calyx Capital Advisors  


At Calyx, we help families protect and manage their financial resources.  We are a financial advisor and investment manager that partners with our clients to administer their financial affairs with personal attention and active risk management. 

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