According to a report this morning from Credit Suisse, a large wave of retail investors—commonly known as “Mom & Pop” investors—seemed to anticipate the downturn for the stock markets over the last several weeks. During July, before the worst volatility hit U.S. markets and sent stock indices plunging, moms and pops pulled $8.4 billion out of bond funds and $6.5 billion out of mutual funds.
Whether out of gut instinct or by the guidance of prescient advice, these retail investors yanked their funds out of stocks prior to the bloodbath that erased more than 5% of the value of the Dow Jones and S&P 500, even after a considerable rebound in the final few trading days of August.
Ye of Little Faith?
It is rare that a large outflow from equities and funds tied to them doesn’t coincide with a correlating inflow of investor money into the bond market. This is because bonds are generally valued for their safety, making them more attractive when people believe that equities are too risky. The heavy outflow of both stocks and bonds simultaneously indicates that investors would prefer to exit the markets completely because it all seems too high-risk at the moment, preferring to wait out the volatility and carnage before deciding on future investments. The report suggests that most of these withdrawn funds were converted into cash.
June also saw outflows from both bonds and equities, though in much smaller quantities. Nonetheless, this was the first time that both asset classes had net withdraws in consecutive months since 2008, in the heart of the financial crisis.
Gold Surges, Stocks Sink
As these funds were being pulled in July and the U.S. stock markets laid an egg during August, the precious metals also exhibited quite a bit of volatility. Part of the choppy trading was the result of metals being sold in China in order to cover margin calls when mainland stocks tanked. Even after a two-day run on Thursday and Friday where the Shanghai Composite gained 5.3% and 4.8%, respectively, the index remains a whopping 37% off from its high earlier this summer.
As China has intervened to prop up its equities and currency markets, however, it would seem that uncertainty is swirling around whether or not Western central banks will delay raising interest rates—or go the other direction and actually institute more easing policies. The European Central Bank (ECB) has signaled that it is fully prepared to unleash even more quantitative easing even as its first QE program has only just begun to take effect. In the U.S., the news jumped on Minneapolis Fed President Narayana Kocherlakota pronouncing that the conditions are bad for a rate hike from the Federal Reserve through the rest of 2015, and that the central bank may need to engage in more quantitative easing itself.
One wonders if the ostensible failure of QE-heavy “Abenomics” in Japan serves as any warning to central bankers in Europe and the States. Some investors aren’t waiting to find out: gold spiked $12, or more than 1%, to $1,138.50/oz at Friday’s open. Meanwhile, silver and platinum continued their rally from the day previous, moving up to $14.70/oz and $1,027/oz, respectively.