Have Joe and Joanna Q. Public been buying the stock market rally of the past five months?
Not according to our data.
Instead, they show that ordinary investors have been bailing out of stock funds for months. (And this was even before the last couple of weeks, when the market rise stalled and then started going into reverse.)
The data come as Fidelity Investments, the retirement plan giant, reports that average account balances fell sharply during last year’s rout. Though the Boston-based firm noted that balances rose during the fourth quarter (as the market rallied) and were higher than a decade ago.
First let’s look at stock market activity by ordinary members of the public.
The chart above shows money flows into and out of stock market mutual funds and ETFs. When the numbers are positive, they show that the public put more into these funds than they took out: That the public, on balance, were net investors. If the numbers are negative they show that the selling outweighed the buying: The public, on balance, were taking money out of the stock market.
The numbers come from the Investment Company Institute, the fund industry’s trade association, and covers about 98% of all funds.
The chart shows rolling three-month averages, to smooth out short-term variations from month to month and show the broader trend. And the picture is pretty clear.
The public have been bailing out of stock funds since last spring. The stampede into the market in 2021 and early 2022 is ancient history.
October is the only month since last May when the public were net investors in stock funds. And they’ve been selling funds for four of the past five weeks.
OK, so “sentiment” is a subjective thing to try to gauge. The weekly survey by the American Association of Individual Investors, for example, has been net bullish until this week.
There again, what people actually do with their money is probably more interesting than what they say. It doesn’t cost you a nickel to say you’re optimistic or pessimistic. What matters is how you bet.
Meanwhile the news on 401(k) and IRA balances from Fidelity Investments raises questions about what actually happened to ordinary investors last year.
The S&P 500 fell 18% in 2022. But according to Fidelity Investments the average balance of 401(k)s and IRAs fell even further—even after including all the extra money that savers poured into them.
The average 401(k) ended the year at $103,900, down nearly $27,000, or 20.5%, from the figure a year earlier. The average IRA was down even further, more than $31,000 or 23%, at $104,000.
This was the case even though the average participant continued to save nearly 14% of their salaries.
What isn’t clear is how far these sharp falls are the result of investment losses, and how far a changing mix of investors. Fidelity reports a rising number of accounts held by younger investors, notably millennials and Generation Z, as you’d expect. And those accounts inevitably have far lower average balances than those held by older investors near retirement.
A Fidelity spokeswoman confirmed that churn was a factor. “Participant churn is constant and older participants (with higher balances) are constantly closing out their accounts and being replaced by newer employees with minimal balances starting out,” she said.
Fidelity’s data often give an important insight into the retirement savings of Americans because the company is a giant in the industry. It handles the tax-deferred retirement savings plans — meaning 401(k) and 403(b) plans — for 24,500 organizations and 22 million people, plus the IRA accounts for 13.6 million.
It’s hard to say whether the news is bad or neutral but it’s hard to see it as positive.