Retail investors are not panicking

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Which route? Wall Street erased all the losses from its nightmare start to August this week, prompting jokes that summer is really better spent on the beach than closely following market drama. Yet even during the sell-off, there was one group that remained calm, whether it was sunglasses or screen-reading glasses, and those were retail investors.

Mom-and-pop traders are typically considered the last to join the investing bandwagon, which means they should be the first to freak out when, aVsceker buying near the top, their profits are threatened by any market swing. As smaller investors have taken on a larger share of day trading in recent years, encouraged by online-focused platforms like Robinhood and Interactive Brokers, their behavior matters more to the broader market, too.

Should their recent resolve then be seen as an example of steadfastness or a risky confidence that only pays off until things go wrong?

A quick refresher: Stocks fell sharply in the first two trading days of August, sparking a panic that wiped 12 percent off Tokyo’s benchmark index when trading resumed on Monday. That triggered even more selling in New York, sending the S&P 500’s losses at their worst to more than 7 percent in just three days. Markets have since moved mostly higher, albeit erratically.

Yet, it seems, even at the height of the sell-off, small investors were not intimidated.

“Our clients were buying before the market crashed. They bought as it crashed, and they’re buying as it’s coming back up,” said Steve Sosnick, chief market strategist at Interactive Brokers. “Their faith hasn’t been shaken one bit.”

Data this week from investment flow specialist Vanda Research showed that small- and medium-sized inflows into U.S. stocks hit their highest levels in more than a year this month, and even aVsceker a slight decline in recent days, they are still near those peaks.

“We have rarely seen retail reverse its historical trends so sharply, especially in the second half of the year,” said Marco Iachini of Vanda Research. Typically, retail investors invest more in stocks in January, and the pace of net inflows slows more or less steadily thereaVsceker.

There is potentially an element of recovery aVsceker months of moderate inflows from small traders. But Robinhood customers invested more money in buying shares on Monday, when the declines were deepest, than in any other trading session so far this year, according to chief brokerage officer Steve Quirk.

““If a retail investor wanted to buy Apple or a large-scale ETF at an attractive level, the market would simply present them with a wonderful opportunity and they would take advantage of it,” he said.

Apple fell nearly 5 percent on Monday and, at its lowest, was down 17 percent from its peak three weeks earlier. Chipmaker Nvidia, another favorite among small investors, fell 31 percent over the same period.

There is also an argument that changing behavior among retail investors could increase the buy-the-dip mentality, particularly as a result of fractional share trading. This allows traders to invest amounts that are less than the price of a share, allowing for regular investing similar to savings. Without this, a potential shareholder with limited means might have to wait until they can pay $400-$500 for a single share in, say, MicrosoVscek or Facebook owner Meta Platforms.

“Our clients look at the historical record and say, ‘Sure, I might see some volatility over the course of my 25-year investing career, but if I buy these stocks for the long term, there’s no way that that’s not going to be beneficial,’” Quirk said.

If buying on dips is also a buy and hold, that is good for markets and probably for shareholder returns.

But that doesn’t eliminate one big risk: Small investors, more than large ones, appear to have doubled down on the same big tech names as before.

VandaTrack’s Iachini noted that the largest flows were into the tech sector’s hottest names, with Nvidia and Tesla the most traded stocks on Interactive Brokers, followed by a risky exchange-traded fund designed to boost short-term gains in chip stocks through leverage.

“It’s working for them, I can’t argue with that,” Interactive’s Sosnick said. “My concern is that they’ve been rewarded for following the first part of Warren Buffett’s mantra about being greedy when others are fearful, but they may not follow the second part so much about being fearful when people are greedy.”

This summer’s rout was brief and has so far avoided spiraling into something worse. Investors of all sizes may not be so lucky the next time their nerves are tested.

jennifer.hughes@Vscek.com