The ‘Dumb Money’ Tops the Sophisticates in the Market, BofA Says

Sometimes, yesterday’s smart idea turns into today’s dumb one. But maybe it actually has stayed smart all along. Consider what’s happening in the stock market.

Buying on the dips was a pretty good strategy when the market was soaring last year. The shares these investors picked up on the cheap always bounced back, and then some. There are fewer such intrepid folks nowadays who buy when prices slip, though.

Last week, as the S&P 500 slid 1.3%—amid Ukraine, inflation, and other nastiness—investors were net sellers of U.S. stocks, to the tune of $1.3 billion. That marks a change in attitude: For much of this year’s stock decline, they were net buyers.

Turns out that last week’s sellers were hedge funds, according to Bank of America Securities. And retail investors, writes BofA strategist Jill Carey Hall, “who have been net buyers every week this year, continued to buy the dip.” So did institutional investors, as they have for five of the last six weeks, she reports in a research note.

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Forget the old saw that retail investors are the dumb money, serving as a contrary indicator, because whatever they believe is invariably wrong, the BoA note maintains. Guess what? “S&P 500 returns following periods of retail inflows have been above-average and returns post-retail selling have been below average, with retail flows a slightly better positive indicator than hedge fund flows,” Hall says.

During the current dip, retail investors have been the most aggressive stock purchasers, and that has been the case amid other corrections following the 2008-09 financial crisis, Hall observes. The market’s present situation, with the S&P 500 down 12.5% year to date, certainly qualifies as a correction (off 10% from the index’s most recent high point).

About that dumb money charge: The upshot, she concludes, is that “retail flows [are] a slightly better positive indicator than hedge fund flows.”

The retail crowd’s biggest inflows lately have been into communications services, financials and industrials. The last two are categories that investors are most bullish about, a BofA survey finds.

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Tags: Bank of America, buying the dips, Hedge Funds, institutional investors, Jill Carey Hall, Retail Investors, S&P 500

Pension funds for New York state and New York City, as well as the Pennsylvania State Employees’ Retirement System Board, have joined a growing number of institutional investors divesting from Russia.

New York State Comptroller Thomas DiNapoli said he directed his staff to prohibit all new investments in Russian companies and review the $279.7 billion New York State Common Retirement Fund’s current investments and assess whether they present financial risks that warrant further restrictions or divestment. He said he is also reaching out to the pension fund’s investment managers to urge them to conduct similar examinations to mitigate investment risk and minimize market impact.

DiNapoli estimates the pension fund has $110.8 million in public equity investments in Russian companies, including direct holdings and co-mingled funds.

“Russia’s unlawful invasion of Ukraine has led to unprecedented sanctions against Russian companies and individuals,” DiNapoli said. “While American sanctions already prohibit investments in many Russian companies, I believe it is prudent to freeze purchases in all Russian companies due to the situation’s unpredictability and the likelihood that conditions will deteriorate. This will ensure that the fund does not increase its minimal exposure to the Russian economy while completing its divestment review, consistent with my fiduciary duty.”

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Meanwhile, the trustees of the $88.2 billion New York City Employees’ Retirement System voted to approve a resolution directing Comptroller Brad Lander to carry out the divestment of the system’s investments in securities issued by Russian companies. NYCERS, which has more than 350,000 active members and retirees, said it held approximately $31.1 million in Russian securities as of February 25.

“As the unlawful invasion of Ukraine by the Putin regime continues, the investment risks, economic volatility, and calls for an immediate end to these acts of aggressions by the global community have only grown,” Lander said.

Under the resolution, the divestment extends to all of NYCERS’ public equity and public fixed income investments in securities issued by Russian companies and include both active and passive products. It also requires managers of passively managed accounts to reinvest the funds from divested securities pro rata and managers of actively managed accounts to reinvest funds consistent with the investment objectives and strategies of their mandates for NYCERS.

Meanwhile, the Penn SERS board of trustees has directed staff, hired managers and consultants to take all actions necessary to divest the pension fund of all Russia-related assets “in a prudent manner and within a reasonable time.”

Penn SERS Board Chairman David Fillman said the board was briefed by its staff and outside consultants on the “heightened volatility, risk, and potential for losses” due to exposure to Russia-related investments. As of March 3, the Penn SERS fund had approximately $7 million, or 0.02% of its total fund value, invested in Russia-related investments.

The pension fund also reported a 17.24% return on investment in 2021 and approved $400 million in new private equity investments.