Retail Investors Are Dropping Out of the Stock Market

Text size

There was a time—during the pandemic era—when retail investors were participating in the stock market, even driving its movements. This year, they have been much less active. 

Retail traders—those directly buying shares of individual companies, exchange-traded funds and options on popular trading platforms like

Robinhood

and TD Ameritrade—were particularly active last year, driving strong demand for stocks. In late 2021, retail investors were helping to send stocks higher every time they briefly dipped, allowing the

S&P 500
to ride out the final four months of the year without a pullback of more than 5%.  

Daily net purchases from retail traders, or the dollar amount of their daily buy orders minus sell orders, was more than 50% higher in October than it was in the summer, according to

Morgan Stanley

data. By the end of the year, about 11% of trading volume in the 1,500 stocks in the

Russell 3000
index with the highest market values was from retail money. That is above the median of just over 8% since 2016.

Even as the market came to expect the Federal Reserve to lift interest rates, which can lower economic growth and make stocks a less appealing investment, retail traders were playing a role in keeping stock prices elevated. 

Now, that is changing. In recent days, only a little over 7% of trading volume for the 1,500 largest Russell 3000 stocks has been from retail orders, according to Morgan Stanley. And stocks have fallen hard as the role of retail money has diminished. The S&P 500 is now down just over 11% for the year. 

Of course, all kinds of investors have been selling stocks. Higher interest rates will weigh on economic growth, and the Russia-Ukraine war poses yet another batch of risks. Among them is the possibility that worse-than-expected inflation, the result of the western world not buying Russian oil due to sanctions over the invasion, will force the Fed to raise rates more aggressively than it would have otherwise.

But it is clear that retail investors aren’t offering much support. “The short answer is yes,” said Keith Lerner, co-chief investment officer at Truist, regarding whether reduced retail demand is hurting prices. As price declines intensify, Lerner said, retail investors typically get scared away from the market. That could be happening now. 

To be sure, interest in the stock market is still fairly high. So far this year, just over $20 billion, on net, has flowed into Vanguard S&P 500 exchange-traded funds, according to Jefferies data. That number, though, likely contains a bigger share of buy-and-hold investment money, so it is different than figures on single-stock trading, which do show waning retail demand.

The point is that the market may have lost a key customer for now. 

Write to Jacob Sonenshine at [email protected]