Institutional investors seized the early August market volatility as an opportunity to purchase discounted stocks and equity ETFs, according to a Tuesday Bank of America note.
Earlier this month, the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, dropped more than 8% from its July 16 high, while the Nasdaq 100, heavily weighted in tech stocks, plunged over 10%, officially entering correction territory.
The CBOE Volatility Index, or VIX, commonly referred to as the market fear gauge, skyrocketed to above 60 points, marking the highest surge since March 2020.
Major Inflows After Market Slump
Despite the volatility, last week saw a significant shift in market sentiment. Bank of America Securities clients were net buyers of U.S. equities, with inflows totaling $5.8 billion—the first net positive in five weeks and the 10th-largest inflow recorded since 2008.
These inflows were spread across single stocks and equity ETFs, with single stocks seeing larger allocations. Remarkably, all market caps—large, mid, and small—experienced positive inflows.
Pullbacks of 5% or more are relatively common, occurring more than three times a year on average since 1930, according to Bank of America. Corrections of 10% or more typically occur once per year, with the most recent one being in the fall of 2023.
Historically, since 1930, there have been 98 corrections of 10% or more, but the S&P 500 has still managed to deliver nearly 25,000% in total returns over that period, the analysts said.
Tech, Communication Services Lead Inflows
Tech and communication services stocks led the charge in inflows, a trend consistent with cumulative data year-to-date.
Communication services stocks have maintained the longest buying streak, now at 19 consecutive weeks, while tech stocks saw inflows for the first time in four weeks.
Seven of the 11 sectors recorded net inflows last week. Financials, which had their largest inflows since April, were the second-most purchased after TMT (Technology, Media, and Telecommunications) stocks.
On the other hand, investors sold off Energy, Staples, Real Estate, and Utilities stocks. Energy stocks, in particular, have now seen three consecutive weeks of outflows, the longest current selling streak among sectors. Industrials, which had been on a four-week selling streak, experienced their largest inflows since March.
ETF inflows were strong across all investment styles — growth, value and blend — as well as across large-cap and broad market ETFs. However, small- and mid-cap ETFs faced outflows.
Consistent with single-stock activity, tech ETFs, such as the Technology Select Sector SPDR Fund XLK, attracted the largest inflows, while health care ETFs, such as the Health Care Select Sector SPDR Fund XLV saw the most significant outflows.
The Challenges of Market Timing
Bank of America emphasized the difficulty of timing the market’s ups and downs. The probability of losing money in the S&P 500 over a single day is close to 50% (46%), but this probability drops to just 5% over a 10-year horizon, according to data going back to 1929.
The challenge of market timing is further highlighted by historical data: since the 1930s, an investor who missed the 10 best trading days per decade would have seen returns of just 76%, compared to the nearly 25,000% return from staying invested throughout.
“Panic selling can be a bad idea, as the best days often follow the worst days,” analysts at Bank of America wrote.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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