Key Points
- Retail investors are net buyers, visible through rising margin loan balances.
- Institutional investors appear to be selling U.S. equities and reallocating into foreign stocks, gold, and currencies.
- S&P 500 and Nasdaq 100 are negative YTD, while major foreign indices and gold are up.
- Margin loan spikes have historically preceded major and minor market sell-offs.
- Risk of retail investors being caught over-leveraged is high.
- Our suggested positioning: cash, defensives, and high-yield stocks amid a rising stagflation risk.
What Do We See? Individuals Buy, Institutions Sell
Individuals are buyers, institutions are sellers. Identifying fund flow trends by category is tough, but anecdotal evidence points to institutional investors rotating out of American equities while individual investors are net buyers.
The main challenge is that fund flow data is fragmented across dozens of sources and often delayed by weeks. As a result, strategists and macro analysts tend to lean on their preferred signals to interpret broader market behavior—often assuming historical correlations still apply.
Margin loans outstanding is our preferred look-through for retail investors’ long equity exposure. While both institutions and individuals use margin accounts, various polls suggest retail accounts represent the majority of the ~25% YoY growth in margin debt, with a significant portion using leverage.
On the institutional side, we look at the flows (and price action) of alternative asset classes such as foreign equities, currencies, and gold. Although institutional flow data is typically delayed, price performance suggests active rotation. Year-to-date:
- S&P 500: -4.8%
- Nasdaq 100: -10.3%
- FTSE 100 (UK): +5.4%
- DAX (Germany): +13.4%
- CAC 40 (France): +6.5%
- Gold (front-month futures): +18.6%
This dispersion aligns with the idea that institutional capital is rotating out of U.S. equities and into foreign markets and inflation hedges.
Why Margin Loan Spikes Worry Us
Since 2000, spikes in margin loan balances have preceded both large and small market sell-downs. Before each of the major downturns—the dot-com crash (2000), the Global Financial Crisis (2008–09), and the inflation-driven sell-off (2021–22)—we observed a sharp rise in outstanding margin debt.
Even more moderate corrections, such as the European debt crisis (2011), the end of QE (2014), and the start of QT (2018), were preceded by similar moves in margin loan activity.
Today, we are at the tail end of the second-largest margin loan buildup this century—second only to the post-COVID run-up. To us, this indicates an elevated risk that retail investors are overexposed and vulnerable to a drawdown.
Our Suggested Positioning
As we’ve highlighted before, we continue to favor a rotation into cash and defensive sectors, while including high-yielding stocks in core portfolios.
This positioning is based on a view that the market underestimates the risk of stagflation—a scenario of low growth and high inflation that could force the Federal Reserve to respond with recessionary policies (i.e., raising rates), even at the cost of a deep downturn, similar to the 1979–1982 cycle.
