- This year’s stock market rally could soon reverse as the retail FOMO trade fizzles out, according to Vanda Research.
- The firm said that while retail inflows into stocks remain strong, seasonal patterns suggest they will soon fade.
- “Seasonality ahead of tax season suggests that flows into US markets will begin to decelerate,” Vanda said.
The retail FOMO trade that helped spark a near-10% rally in the S&P 500 last month is about to fizzle, and that could help accelerate a sell-off in the stock market, according to Vanda Research.
Individual investors have been pouring money into the stock market in the first six weeks of 2023, with average daily net purchases sitting around $1.5 billion. On Wednesday, retail investors poured $1.2 billion into stocks, according to Vanda, and they’re buying everything from a slew of ETFs to mega-cap tech stocks like Tesla and Amazon.
Retail investors are buying the dips in stocks even as concerns about elevated inflation, higher for longer interest rates, and geopolitical tensions linger.
But seasonal patterns suggest that retail investors buying of stocks is set to fade between now and April, not because of market risks, but because of the upcoming tax filing deadline.
“Seasonality ahead of tax season suggests that flows into US markets will begin to decelerate,” Vanda said in a recent note. “[The] buying of ETFs and single stocks in April tends to decline in unison. That’s because… in April, selling (or rather, less buying) generally occurs across all securities, implying that investors hold back their investments to build cash to pay their tax liabilities.”
The expected decline of retail flows into stocks could in turn weigh on the US stock market given its dependence on individual investors, Vanda said. But there is a signal to watch for to determine if and when the potential market weakness ends.
“Should stocks come under pressure on the back of decelerating retail flows in the weeks ahead, capitulation in the less-preferred tech names could help identify an eventual turnaround,” Vanda said. “Over the past year, capitulation in this segment of tech has tended to coincide with turning points in the broad indices.”
And if stocks continue to decelerate between now and tax day in mid-April, Vanda expects retail inflows into stocks to pick up towards the end of the second quarter, based on seasonal data.
“Seasonality typically improves in late Q2, but investors will first have to tread carefully in the weeks ahead given how dependent on retail investors US stocks have become,” Vanda concluded.