Investors stay put because they can’t think of better options
Even the worst markets are supposed to have safe havens. Some pissed off investors wonder if this one doesn’t.
The S&P 500 is down 16%, its worst start to the year since 1970, according to Dow Jones Market Data. But assets of all kinds are also falling. Gold, generally considered a safe haven, tipped into the red. Bonds are usually another safe haven, but this year they’ve fallen alongside stocks, an unusual tandem that reflects investor uncertainty.
The risky cryptocurrency market, touted for years as a counterbalance to traditional stocks, is also imploding, with bitcoin losing more than a third of its value in 2022.
This market to sell everything confuses large and small investors after a series of years where the markets seemed to go straight up. Now investors are faced with runaway inflation and the end of accommodative monetary policy. There is also the question of whether the United States is heading into a recession, which some investors fear if the Federal Reserve raises interest rates too quickly.
Many traders say they are on the lookout for other investments, but even proven alternatives have lost their appeal. A cash rush – a common strategy in turbulent times – looks less attractive when inflation exceeds 8%, which reduces purchasing power. Investing in real estate can seem like a failure when mortgage rates are rising and house prices are at record highs.
The only option, say some investors? Well seated.
“There’s a paralysis,” said Greg Swenson, founding partner of Brigg Macadam, a London-based investment bank. “Even if people sell, they don’t know how to reinvest it.”
Some investors hold onto their stocks because they bet they will eventually be rewarded, and even buy more on down days. Others hang on because they can’t find anything better to do.
A recent analysis by Bank of America Corp. shows that equity outflows have been relatively small. The bank estimates that for every $100 poured into the stock market since the start of 2021, so far only $4 has been withdrawn. That’s based on data through Wednesday from EPFR, which tracks the movements of retail and institutional investors in exchange-traded funds and mutual funds.
This implies that investors are still not panicking. It also suggests that stocks could fall further. During the 2020 Covid-19 stock market selloff, for example, investors took out $61 for every $100 invested, Bank of America analysts found. During the financial crisis, it was even worse: investors redeemed $113 for every $100 invested.
At the end of last month, some 59% of individual investors said they expected stocks to fall over the next six months, according to the American Association of Individual Investors, the most bearish sentiment since the financial crisis. That same month, however, stocks made up around 70% of their portfolios, hovering around the highest levels since 2018.
Investors struggle with two competing desires: a safe place to park their money and a hunger for market returns.
Take the example of money market funds. In seven of the 11 weeks since Russia invaded Ukraine, investors have withdrawn a total net of $186 billion from money market funds, according to EPFR. In the other four weeks, they voraciously poured out a net total of $132 billion.
Al Catella stopped checking his brokerage account, thinking it best not to know. Mr. Catella favors dividend-paying stocks such as Chevron Corp. and Lockheed Martin Corp., which have offered positive returns this year. But, he said, that stock portfolio likely also suffered from the decline in Comcast Corp stock. and JPMorgan Chase & Co. He would like to put more of his money to work, but he doesn’t know where to deploy it.
“I’m a little wary about entering the market right now,” said Mr. Catella, an 83-year-old attorney from Illinois.
In January, when stocks began to fall, Mr Catella shifted more of his retirement portfolio into bonds, a move he now regrets given the performance of bonds this year. “They say bonds are good protection, but it seems like they never helped me much,” he said.
Individual investors aren’t the only players wondering where to take shelter, especially amid expectations of more pain to come.
“There’s still plenty of air to come out of the market,” said Charlie McElligott, cross-asset macro strategist at Nomura Securities International Inc. “It’s a market with nowhere to hide right now.”
Florian Ielpo, head of macro at Lombard Odier Investment Managers, said his team started in January to reduce its overall market exposure. Today, 70% of the company’s flagship multi-asset portfolio is in cash. It’s not necessarily his first choice, he said, but he finds few alternatives. In addition to cash, he said, the flagship fund has small exposures to commodities, stocks and bonds and other trend-following strategies.
“We are looking for diversifiers,” Mr. Ielpo said, “but some diversifiers no longer work.”
Write to Caitlin McCabe at [email protected]
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