How Did the War in Ukraine Affect Retail Investors?


Over the past two years, retail has become a bigger, more important part of the U.S. stock market since Covid. Recent comments suggest retail interest in stocks is starting to fade, with experts estimating retail trading activity has fallen from highs of 27% of all trading volumes in early 2021 to about 18% now, although still above their pre-pandemic levels of about 13%. 

However, when using Nasdaq’s U.S. Retail Equity Flows (UREF) data, which we first discussed last year, we see the level of retail value traded actually increased in the first quarter of 2022. 

A tough start to 2022 for investors 

On the economic front, a lot has happened since December. The U.S. 10-year interest rates have increased almost more than 100 basis points, a whole percent, as the Fed has officially started to raise official short-term rates and is talking about doing it more quickly to tackle inflation. That has created headwinds for stock valuations. 

Then on Feb. 24, Russia invaded Ukraine. That led to a humanitarian crisis and sanctions that caused a lot of uncertainty. The VIX index, which measures expected volatility, more than doubled from around 16 to over 36. 

That’s made for a tough start to the year for most investors. Broad market bond and stock portfolios are down (Chart 3). In the U.S., the Nasdaq fell into bear market territory, down 22% before recovering, with other U.S. indexes falling into a technical correction, down over 10%. 

Only two sectors had positive returns for the quarter, Energy and Utilities (Chart 6), spurred by rising prices for oil and gas.  

Chart 1: Stocks and bonds fell as rates rose in Q1; commodities spiked once the war in Ukraine started 

Stocks and bonds fell as rates rose in Q1; commodities spiked once the war in Ukraine started

Markets are not great at accounting for the horrible human and societal toll of wars. But they do a better job of identifying economic costs. Within days, prices of commodities started to rise. Data shows that Russia and Ukraine dominate the global supply of a number of important commodities, across energy (black), agriculture (green) and metals (blue dots in Chart 2).  

Clearly, with the war continuing, markets expect output will be reduced, potentially causing shortages and new supply chain bottlenecks. That lack of supply should push up prices. In the most affected materials, commodity prices have already gone up the most.  

Chart 2: Commodity prices have risen the most where Ukraine and Russia dominate supply 

Commodity prices have risen the most where Ukraine and Russia dominate supply

Retail activity increased 

Interestingly, despite asset valuations falling, retail has remained active. Our retail activity indicator suggests gross trading is running over $38.7 billion a day, up 12.3% on the $34.5 billion per day seen throughout most of 2022 (green area in Chart 4).  

That’s also roughly in line with changes in market-wide activity (blue line), with ADV in the U.S. market averaging over 12.8 billion shares, or over $728 billion, each day in 2022. 

Although, when looking at shares traded (volumes), we can see that our retail measure has remained fairly constant at just over 1 billion shares per day. A sharp contrast to January 2021, when meme-stock trading saw retail activity spike to almost 3 billion shares per day. 

Chart 3: Retail trading volumes have been increasing in line with market-wide activity 

Retail trading volumes have been increasing in line with market-wide activity

Retail bullishness faded 

Throughout the past two years, we’ve seen retail being pretty consistent buyers of stocks, especially through ETFs. However, the 2022 data shows that retail has been less bullish, especially during February, before and after the invasion of Ukraine (grey bars, Chart 5).  

In total, retail has bought a net of only about $11.8 billion in stocks for the whole quarter, well behind the approximately $15.5 billion that they bought per quarter last year. 

One sector, in particular, seems to describe these trends. Consistent buying in the Tech sector (blue bars in Chart 2) has turned into consistent net selling since February.  

Chart 4: Retail turned sellers off stocks for just a few days at the end of January 

Retail turned sellers off stocks for just a few days at the end of January

Buying growth ETFs rebounded 

We also saw in our last review of this data that retail had shifted away from Growth ETFs as interest rates started to climb (Chart 6). That made sense, given that rising rates are expected to put some pressure on valuations, especially for companies with most earnings further into the future.  

However, March data shows growth ETFs closing the gap, in line with allocations last year’s allocations to value and growth ETFs, despite the fact that rates kept rising. 

Chart 5: Retail pivoted away from growth ETFs in January and February but has returned even as rates keep rising 

Retail pivoted away from growth ETFs in January and February but has returned even as rates keep rising

But stock buying was in Financials and Consumer names 

In contrast, net buying of corporates was concentrated in Financials and Consumer Discretionary stocks (blue bars in Chart 6). 

Typically, Financials benefit from rising rates, as the interest rates they can earn on loans can increase. In fact, mortgage rates recently breached 5%. However, Consumer Discretionary names may be more exposed to inflation – unless those companies are able to raise prices enough to keep up with higher costs – without consumers deciding to stop buying those “discretionary” products. 

Somewhat surprisingly, given the rally in energy stocks (orange triangle, sector up 37.7%) and the rising underlying commodity prices, net buying of stocks in the energy sector was weak. Although Communications was the second-worst performing sector (down 11.5%) but also had the third strongest net inflows ($1.5 billion) – seeming to bust the myth that retail follows market trends and exacerbates momentum.  

As Covid fades (hopefully for good), healthcare stocks were the only sector to see net selling.  

Chart 6: Most sectors were down, but retail has had net buying of stocks in all sectors except healthcare 

Most sectors were down, but retail has had net buying of stocks in all sectors except healthcare

It is also interesting to look at the 10 most active stocks (by value) over the last quarter.  

Despite the fact that we’ve seen that historically around two-thirds of all net retail buying is allocated to ETFs, more than half of the top 10 traded stocks are corporates. All are what we would in the past have called “tech” stocks: NVDA, AAPL, TSLA, META (FB) and MSFT – although index providers split that sector across communications and consumer sectors back in 2018

It’s also interesting to see that, even for these very active stocks, retail buying is close to matched by selling, net flows are relatively small as a percent of overall trading. 

We can proudly say that Nasdaq listings dominate this list, with all six corporates listed on Nasdaq and Nasdaq-100 ETFs making up three of the four ETFs on the list. Arguably, our listings drive a lot of the returns in SPY too.  

Chart 7: Top 10 most active retail stocks almost all Nasdaq listed

Top 10 most active retail stocks almost all Nasdaq listed

No evidence that retail interest in investing is fading yet 

Although some of the latest economic data show personal savings have fallen back to pre-Covid levels for many households, pushing retirees and others back into the workforce, the evidence so far suggests that has had little impact on the level of interest retail has in stock investing. 

And as other data shows, that’s good for U.S. households. 

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