Retail investors are running low on financial and emotional capital to continue aggressively buying the dip in the stock market, says research firm

• Retail investors have been putting less money into buying stocks and weakness could persist over the next couple of months, said Vanda Research.
• Amateur traders have working with less financial capital as they face portfolio declines of at least 20%.

Retail traders have been plowing less money into US equities and the weakening trend could last through part of this summer, research firm Vanda said Wednesday.

There's been a clear decline in the pace of equity inflows, with aggregate purchases on a three-month rolling basis falling to $73 billion from $77 billion in early April, said the firm whose VandaTrack tool monitors retail activity in thousands of US stocks and ETFs.

The slowdown could likely persist over the coming one to two months, it said, in part as investors contend with a difficult macroeconomic backdrop and their confidence being chipped down by poor portfolio performance.

"As personal savings' share of disposable income has now retraced to pre-covid levels (6.2%) in the US, we doubt that retail investors will have much more financial and emotional capital to continue buying the dip aggressively, particularly if equities were to experience another leg lower from these levels," Vanda researchers Marco Iachini and Giacomo Pierantoni wrote in a weekly update.

"Moreover, our view rests on the fact that the average investor is facing a >20% drawdown in their equity portfolio," they said. "For comparison, during the COVID sell-off, retail investors capitulated after their portfolio drawdown broke below 25%, while in prior instances, retail began net selling equities whenever the average portfolio crossed below -8.5%."

The benchmark S&P 500 recently re-entered correction territory, or a loss of 10% or more from a recent high, after paring its decline during a March rally. Stocks this year have pulled back largely as the Federal Reserve has started and signaled a lengthy and aggressive pace of interest-rate hikes to cool decades-high inflation that sat at 8.5% in March. The Fed on Wednesday was expected to deliver a rate increase of 50 basis points, the largest since 2000.

Vanda also said wealthier and older retail investors haven't been so bearish on equities since 2009 and that fact, combined with more attractive cash yields, could lead them to shift part of their asset allocation towards money market funds.

Taking a look at December 2018 when a market sell-off was driven by hawkish monetary policy at the Fed, the firm said this could translate into a negative 3% rotation from equities to cash-proxy products.

"Markets always find ways to put investors through the toughest of tests…time will tell if the new-age 'diamond hands' mentality will hold," the researchers said.