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Retail investors give pause to the market while institutions jump in.

In December 2023, as the S&P 500 approached its all-time high, retail investors displayed a notable sense of caution and unease in the stock market. They chose to sell off more than $25.92 billion in stocks during that month, a noticeable uptick from the $23.63 billion in sales recorded in November 2023. This brisk pace of selling marked one of the most bearish sentiments among retail investors in recent years, as reported by S&P Global Market Intelligence.

This caution among investors can be attributed to a combination of factors. Firstly, it's evident that they've been learning from the market's volatility in 2022, leading to a sense of skittishness. Secondly, retail investors seem to be cognizant of the market's relatively high valuation, as indicated in a CIO report from Goldman Sachs. This valuation concern is compounded by worries about potential volatility arising from an election year.

In fact, retail investors have not only been cautious but also strategic in their actions. Many of these newer investors in the stock market have opted to take profits from their investments, and they appear hesitant to reinvest that money back into the market. This decision aligns with their desire to shop carefully for opportunities in a market where certain sectors may still offer undervalued options, rather than simply buying into the broader indices, which have become relatively expensive.

The contrasting behavior of institutional investors further emphasizes the cautious stance of retail investors. Throughout 2023, institutions were the largest sellers of equities, with nearly $221 billion in net outflows for the year. However, a significant shift occurred in December when institutions became net buyers with $6.3 billion in net inflows. This reversal in behavior, not observed in the past two years, suggests that institutions may see a change in market dynamics for the upcoming year, possibly contributing to the late 2023 market rally.

Furthermore, the surge in investments in index and exchange-traded funds (ETFs), which purchased a net amount of $44.9 billion worth of stocks in December 2023, underscores investors' desire to participate in the market rally while maintaining a diversified approach. This shift toward index and ETF investments implies that investors sought exposure to the market's upward momentum but preferred to do so through broad sector and market movements rather than individual securities.

In summary, retail investors' cautious approach stems from their lessons learned from market volatility, concerns about market valuation, and anticipation of potential election-year turbulence. Their decision to take profits reflects a strategy to carefully navigate the market and identify undervalued

opportunities. Institutional investors, on the other hand, exhibited a noteworthy change in behavior, potentially signifying a shift in market sentiment. The increased interest in index and ETF investments underscores a preference for diversified exposure.

Source: S&P Global Market Intelligence

By Ken Mooso


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