Crushing financial markets as the failure of three U.S. banks and uncertainty over one major European bank continue to play out did not stop some investors from buying the so-called dip in the stock market at one point last week.
That’s according to a weekly report released Friday from Vanda Research, which said retail investors snapped up $1.43 billion in underperforming financial and energy stocks, as well as some big-cap consumer technology names, on Wednesday, after two weeks of sluggish action.
Amid concerns about the health of smaller lenders, they bought “unprecedented amounts” of too-big-to-fail banks, amounting to nearly $1 billion of retail inflows into financials over the past five days. Vanda’s chart shows the last five days of net purchases where the economy stands out:
Marco Iachini, senior vice president, Giancomo Pierantoni, chief data officer, and Lucas Mantle, data science analyst at Vanda, said:
saw the second most inflows after Bank of America in the past week.
“Some adventurers” bought First Republic Bank, FRC,
PacWest Bancorp PACW,
and Truist Financial’s TFC,
which they described as “riskier bets that could potentially offer massive upside” if systemic risk can be contained.
Stocks rose Thursday after federal authorities organized big banks to inject $30 billion into First Republic Bank FRC,
and avert a fourth bank collapse, following the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank over the past week. Credit Suisse shares CSGN,
meanwhile, fell 25% last week, roiling global markets at times on concerns about the Swiss banking giant’s own survival.
Read: UBS and regulators rush to seal Credit Suisse takeover deal: reports
Still, the rollercoaster ride was back on Friday, with the economy strained and shares in First Republic tumbling again after the bank suspended its dividend and revealed higher borrowing costs. Some of the big banks involved in the deposit plan for the lender also fell, such as JPMorgan Chase & Co. JPM,
Bank of America BAC,
and Goldman Sachs GS,
For the week, the Dow fell 0.1%, the S&P 500 rose 1.4% and the Nasdaq Composite jumped 4.4%, according to Dow Jones Market Data.
Schwab shares lost 3.9% last week, with executives at one point assuring shareholders that the brokerage remained “well positioned.” CEO Walter Bettinger and other executives bought up nearly $7 million in stock during last week’s market turbulence.
The Vanda analysts said part of this equity sector rotation was likely to have been driven by profit-taking on the side of bond-themed exchange-traded funds (ETFs), with inflows into some of the largest of them falling by $250 million over the of the last two weeks. .
But it’s a delicate balance right now, with these investors only going to continue buying shares provided a “systemic crisis” can be avoided, Vanda analysts said.
Read: Credit Suisse shares fall to post worst week since 2008 financial crisis
Read: Consumer sentiment falls for the first time in four months – and that was before Americans knew about SVB
Uncertainty about the Fed’s rate path has caused bond yields to be volatile over the past week, sending the ICE BofAML MOVE Index to its highest level since the 2008 financial crisis as of Wednesday.
Investors pulled $8.8 billion out of primary money market funds at Schwab last week, putting them into the broker’s government and treasury funds amid continued jitters about whether more shoes will drop in the banking crisis, Bloomberg reported, citing company data.
Vanda said the energy sector also saw increasing inflows after Tuesday’s market decline, although analysts said those aren’t the stocks that tend to attract loyalty from traders, so if an increase in declines in buying doesn’t reverse that momentum, more traders will could dump these shares.
Haunted by the ghosts of late 2018 and the 2008 financial crisis, retail investors are in a fragile situation, the Vanda analysts said.
They noted that the capitulation for investors in 2018 came in the fourth quarter “as the stock market began to free fall after an extended period of mixed Fed commentary.” The S&P 500 fell over 9% in December 2018 amid concerns over Fed tightening, an economic slowdown and trade tensions between the US and China.
Markets are gearing up for next week’s Federal Reserve policy meeting. In fed funds, futures traders now see a 75.3% chance of a 25 basis point rate hike next Wednesday on inflation concerns. That while bank stress hovers in the background.
Read: What it might take to calm banking jitters: time and a Fed rate hike.
“We also believe that the fear of ‘systemic risk’ related to the banking sector is more emotionally destabilizing for unsophisticated investors than any marginal sell-off caused by Fed rate hikes or events outside the US,” Vanda analysts said.
“We remain vigilant as we could see increased volatility in flows over the coming weeks, especially if retail traders panic and start moving more of their assets into money market funds.”
Such funds are perceived as safer because the investments are focused on lower-risk areas such as cash and securities that behave like cash, such as CDs and Treasury bills.
One stock that doesn’t get any dip-buying love, they note, is Tesla TSLA,
which continues to underperform the broader market since a disappointing investor day earlier this month, the Vanda team said. Tesla shares have lost 13% this month, versus a gain of 1.3% for the Nasdaq Composite COMP,
“We believe that in this environment, TSLA may continue to lag as investors now have the opportunity to choose from other well-known pockets of the stock market that have been hit recently, such as energy or financials,” they said.
Read: Every hiking cycle over the last 70 years ends in recession or a financial crisis. “It won’t be any different this time,” says the Morgan Stanley strategist.