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The trend of the U.S. stock market cannot even be understood by Wall Street.

In the past three weeks, US stocks, especially technology stocks, have been hit hard. The Nasdaq index has fallen by 10% in a short period of time, and the S&P index has also been hit hard.

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The technology leader is even more bleak: Apple’s stock price has fallen 15% since late January. Tesla lost more than $25 trillion in market value in three weeks. In less than a month, the market value of Nasdaq lost more than $1.5 trillion.

However, although the recent surge in US Treasury yields has hit risky assets, it has been accompanied by a surge in the volatility index VIX and its MOVE index, which reflects the volatility of the bond market.

However, according to the latest report of the fund flow monitoring agency EPFR, US$22.2 billion in new funds flowed into U.S. stocks last week. A huge inflow of US$46.2 billion in the previous week was the third highest on record. In other words, in the past 16 weeks, The total inflow of US stocks reached 436 billion US dollars.

Today, this performance on the US stock market is peculiar.

Today, this performance on the US stock market is peculiar.

Historically, when market volatility increases, investors usually withdraw funds. Now it’s the opposite. They are investing record amounts of money into the stock market.

David Kostin, chief strategist at Goldman Sachs, also noticed this problem:

Treasury bond yields have risen, stocks have fallen, and long-term growth stocks have plummeted, but equity funds continue to see substantial net inflows.

Since the beginning of February, the total amount of funds flowing into stock mutual funds and ETFs is 163 billion U.S. dollars. In absolute terms, the total amount of funds flowing into the past five weeks is the highest in history; relative to assets, it is the third largest fund in a decade Inflow.

Although the recent rise in U.S. Treasury yields has largely suppressed stock prices, the rate of inflows into equity funds has accelerated in the past few weeks compared to the beginning of the year.

 

In contrast, the average weekly inflow of funds into bond funds in February was about $10 billion, which was 50% lower than the weekly inflow of funds in January. In addition, there was a net outflow of US$34 billion from money market funds in the past month.

Where does the money come from?

It is undeniable that US retail investors have become the main force in this round of chasing US stocks.

How active are retail investors?

According to data from VandaTrack, which monitors retail traffic in the US market, retail investors snap up US stocks to an average of US$6.6 billion per week, which is higher than the average weekly net purchase of US$4.7 billion in 2020.

At the beginning of the year, retail investors who shared their trading experience on trading software such as Robinhood and social media such as Reddit have become accustomed to buying on dips.

As Bloomberg pointed out over the weekend, the current market turmoil has not swayed retail investors. They firmly believe that the Federal Reserve and the Treasury Department’s relief program will continue. The current stock market crash has not yet made them tearful. when.

According to Bloomberg News, in 2020, funds from US retail investors poured into the US stock market at a record rate, an increase of 40%.

Art Hogan, chief market strategist at National Securities, said:

Historically, the influx of retail investors into the market is a bad signal and a signal that the stock market is peaking.

However, in 2020, when we see retail investors entering the market frantically, we often expect that the market has peaked, but it is often wrong.

Where did the money go?
Where have all these funds flowed into the stock market?

Is it to continue to chase those stocks that have been hotly speculated?

But in fact, retail investors did not indiscriminately invest cash in all stocks. Instead, the most favored investment areas of equity funds are the areas of style switching, that is, those that benefit from economic recovery growth and control of the epidemic. industry.

In other words, the new funds entering the market actually reflect the switching of US stocks from growth stocks to value stocks.

Calculated in absolute U.S. dollars, stock funds traded in the United States in the past month have seen large inflows (reaching $62 billion). Among them, emerging market stocks, value stocks, small-cap stocks and other equity funds have seen the largest inflows. This is in line with the market. Expectations for economic recovery are consistent.

Kostin believes:

History shows that equity funds usually experience capital inflows when real interest rates fall. In the past ten years, the most favorable background for the inflow of equity funds is the rise in real interest rates and inflation rates.

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