Retail investors aren't trading like they expect a recession anytime soon, Bank of America says

• Retail investors aren't preparing their portfolios for an economic recession, according to Bank of America.
• The bank found that its retail clients have been consistently buying riskier stocks in favor of defensive stocks despite warnings of an economic slowdown.
• "Clients say no imminent recession based on cyclical vs. defensive flows," BofA said.

While Wall Street prepares itself for an economic recession, main street investors don't seem to be worried, according to a note from Bank of America.

The bank looked at the fund flows of its client's trading activity, and found that retail investors are consistently buying riskier stocks over defensive stocks despite the economic warnings from major bank CEOs like Jamie Dimon of JPMorgan and Charlie Scharf of Wells Fargo.

The bank said that its clients were net buyers of US stocks last week, and that its retail investors led the buying while hedge funds and institutional clients were net sellers for the second and third week in a row, respectively. Its retail clients were net buyers for the third week in a row.

"Clients don't view recession as imminent: cyclical sector flows have continued to lead defensive sector flows since last July," BofA said.

That's not the type of behavior one would expect from investors if the economy is on the verge of a recession, as cyclical sectors like consumer discretionary and technology tend to severely underperform more defensive sectors like consumer staples and healthcare as consumers pare back spending habits.

BofA said its retail clients are fueling their purchases of more cyclical sectors by selling commodity-oriented industrial and energy stocks, which have surged over the past two years.

This type of trading activity by retail investors could reflect the fact that consumers remain on solid financial ground, having paid off their debts during the pandemic and boosted their personal savings. While that confidence hasn't shown up in consumer confidence surveys, it has materialized in retail sales data, which continues to hit new records.

BofA said its clients credit and debit card spending was up 9% year-over-year in the month of May. "Despite challenges from higher inflation, households continued to spend at a healthy pace, with spending on services like travel and entertainment continuing to grow," the bank said.

Whether retail investors or hedge funds have it right remains to be seen as economists search for clues about when the next recession will hit and whether the Federal Reserve can thread the needle in terms of reducing inflation without causing the economy to contract.