Stock trader looks at price data
Source: Getty Images

Speculators, Not Investors, Are Fleeing the Stock Market

Mohit Oberoi, CFA - Author
By

Jul. 18 2022, Published 5:29 a.m. ET

U.S. stock markets have been volatile in 2022 and are still down by double-digit percentages. Growth stocks have been hit especially hard. There are concerns that investors are fleeing the stock market amid the losses.

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For U.S. stocks, 2021 was a particularly good year. Not only did the S&P 500 deliver double-digit returns for the third year in a row, but its volatility was muted.

U.S. stocks have crashed in 2022

The tables have turned in 2022, however, and U.S. stocks are deep in the red. Retail investors tend enter the market during the boom period, as we saw between 2020 and 2021, and exit when markets crash.

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According to JPMorgan, institutional investors have pulled out $258 billion from stocks in 2022. And there are also signs of stress in retail trading activity. Popular trading app Robinhood has reported that its MAU (monthly active user) count has fallen sequentially for three consecutive quarters, peaking at 21.3 million in 2021's second quarter before falling to 15.9 million in 2022's first quarter.

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Robinhood’s MAUs have fallen

Robinhood's fall in MAUs is partially due to cryptocurrency volumes shrinking on the platform, but the company’s equity and option trading volumes also fell in the first quarter of 2022. Commenting on the fall, Robinhood said, “The sequential decline was primarily attributable to users with lower balances, who are engaging less in the current market environment.”

robinhoods trading volumes have fallen
Source: Robinhood Facebook
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However, it's not all gloom and doom—some investors have been buying stocks amid the crash. In the second quarter, Morgan Stanley's retail trader count rose sequentially by 0.2 million to 7.8 million, and Vanda Research data shows that retail investors bought $28 billion in U.S-listed stocks and ETFs in March 2022—the most since 2014, when the company started compiling data.

In Q2 2022, retail investors bought $25 billion per month. Whereas that's below the March peak, it's significantly higher than pre-pandemic buying.

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Warren Buffett is also buying stocks in 2022

The “Oracle of Omaha” has also poured billions into stocks this year after being a net seller of stocks in all four quarters of 2021. Berkshire Hathaway has invested in energy stocks, HP, Apple, and Activision-Blizzard, and added Citigroup to its portfolio.

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Speculators, not investors, are fleeing stock market

There are plenty of signs that speculators who entered the stock market over the last two years are now fleeing. Once-hot meme stocks, penny names, and growth companies have crashed. Those who invested in these stocks have suffered massive losses and fled.

Meanwhile, long-term investors see an opportunity. The most prudent approach might be to exit speculative names and pivot toward quality stocks while they're cheap.

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