Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
‘Liberation day’ proved suboptimal for the stock market. The S&P 500’s 4.84 per cent decline was the 23rd biggest since at least 2000, and a larger drop than the one that followed Lehman’s bankruptcy in 2008. Nice.
By the look of Asian and European markets and US futures, today is going to be another bad day, with even Wall Street’s more cautious and circumspect analysts sounding pretty morose right now.
However, like Pavlov’s dogs, retail traders have been conditioned for years to buy the f***ing dip, and this they did in size yesterday. From JPMorgan’s equities team overnight, with their emphasis below:
Despite a sea of red, retail investors stood firm and not only bought the dip but did so at a historic pace. They ended today with +$4.7B of net buying, the largest level over the past decade and +4.4z above last 1Y average. Throughout the day, they bought aggressively at 11am when the market dipped briefly, then gradually sold as the market recovered.
Inflows were remarkably balanced between ETFs (+$2.4B) and singles (+$2.3B). Initially, inflows were spread across multiple names in the first half of the day, but gradually concentrated into Retail favorites (i.e. longer term buy and holds).
. . . . Although the market has undergone its worst 1D performance in five years, the response by Retail investors stood in stark contrast to the 2020 COVID sell-off. At that time, they largely exacerbated the existing institutional selling, with ~75% correlation between market performance and their subsequent flows. Even on days they did decide to step in, they did not have the confidence to pick stocks but instead opted for more diversified ETF exposure, leading to a high ETF-to-singles ratio.
Interestingly, retail traders actually dumped Tesla stock yesterday, despite it being the standout BTFD fave of 2025 so far. In fact, it was the only Mag7 stock that suffered net selling.
Unfortunately, even a record $4.7bn of net buying wasn’t even near enough to provide even a little bit of support for the market, given the massive amounts of selling that institutional investors conducted.
As JPMorgan’s equity derivatives analysts noted yesterday, leveraged ETFs alone probably sold about $22bn of stocks in the US stock market’s closing auction. More selling is inevitably coming from various investment strategies that tie their net exposure to the level of volatility. JPMorgan estimates that up to $20bn could be dumped by vol-targeting investors “over the next few days”.
Moreover, retail traders have not enjoyed a lot of success lately, with JPMorgan estimating that they are collectively down nearly 13 per cent so far in 2025, compared to the S&P 500’s 8.3 per cent decline.
Getting absolutely creamed in 2022 failed to break the BTFD mentality, but a few more weeks like this and they might begin to buckle.
Further reading:
— Stock trader head in hands (Alamy)
Source link
