The long-term outlook for the stock market is improving, according to flow data for US stock mutual funds and ETFs. That’s because institutional investors have put significantly more money into US equity funds over the past 12 months than retail investors have withdrawn.
Institutions have a longer-term investment horizon than the typical retail investor. So it’s encouraging that on balance they’re not just buying the stocks that retail investors are dumping, they’re investing even more.
The graph above summarizes the data, courtesy of EPFR-TrimTabs. In the 12 months to the end of November 2022, during which Vanguard Total Stock Market ETF VTI,
lost 11.3% and the Nasdaq Composite Index COMP,
lost 26.2%, institutional investors poured $408.6 billion net into US equity funds. Meanwhile, net outflows from retail investors, by contrast, totaled $310.1 billion. EPFR-Trim Tabs analyst Winston Chua said in an email that “it’s good in the long run” for institutions to show confidence in the stock.
It’s worth noting that these 12-month totals aren’t skewed by extreme readings from just a couple of months old. Institutions were the source of net inflows in 10 of the past 12 months, according to EPFR-TrimTabs. And retail investors have been the source of net outflows in each of the last 12 months.
“ Retail investors have a much shorter investment horizon than institutional investors and are much more responsive. “
Retail investors have a much shorter investment horizon than institutional investors and are much more responsive. They tend to sell after the market has started to decline, just as they tend to chase a bull market higher.
This is why retail investor behavior is a great contrarian indicator: they will be at best bearish at market lows and at best bullish at market highs. So not only is the net inflow from institutional investors itself a bullish omen, but so is the large net outflow from retail investors over the past year.
The contrasting behavior of retail and institutional investors is the source of Warren Buffett’s famous line that “the stock market is a device for transferring money from the impatient to the patient.” We should only worry about the long-term prospects of the stock market when the same patient investors lose their temper. Fortunately, that’s not happening right now.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Rating tracks investment newsletters that pay a flat fee to be audited. It can be reached at firstname.lastname@example.org
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