Inflation, supply chain hiccups hit Wall Street but retail investors remain net buyers of stocks

Retail participation is high despite the concerns stemming from supply chain pressures and inflation.
(Image: REUTERS)

As rising costs and supply chain pressures weigh in on stocks on Wall Street, retail investors continue to be major buyers of the dip, said Mike Wilson, chief investment officer and chief U.S. equity strategist for Morgan Stanley. He highlighted that retail investors have continued to pour money into US stock markets, unlike what analysts at Morgan Stanley had believed earlier in September when market correction was taking longer to recover. “Perhaps most importantly for the broader index is the fact that retail continues to be a major buyer of the dip,” he said. Retail participation is high despite the concerns stemming from supply chain pressures and inflation.

Retail participation remains robust

Earlier in September, analysts had questioned if retail investors had finally run out of dry powder or willingness to buy the dip. “Fast forward to today, and the answer to that question is a definitive no. Instead, our data show retail investors remain steadfast in their commitment to buying equities, particularly on down days,” Mike Wilson said. Retail investors have been buyers of domestic stocks since last year as more and more new investors entered stock markets across the globe. Retail investors’ buying power has grown significantly during this period with AMC short-squeeze standing testament to the same. 

The strong inflows from retail investors, Mike Wilson believes, is supporting valuations even at the high. “Until these flows subside or reverse, the index will remain supported even as the fundamental picture deteriorates. As already noted, earnings revision breadth is rolling over. Some of this is due to higher cost and supply shortages, which investors seem increasingly willing to look through as temporary,” he added.

Inflation concerns

Although retail investors are not bothered, Mike Wilson has voiced concern over supply chain pressures and inflation. “We remain more sceptical as the data also supports sustained supply chain pressures, rising costs and the potential for weaker demand than anticipated next year,” he said. Wilson highlighted that Morgan Stanley’s economics team, in its Business Conditions Index survey, found that there is material deterioration. “While most of this decline is due to supply issues rather than demand, we’re not sure it will matter that much in the end if earnings estimates have to come down one way or the other.”

Analysts said that apart from diminishing business confidence, consumer confidence is also taking a hit as prices rise. The still robust retail participation Wall Street, in Mike Wilson’s view, shows that investors have realised that stocks offer protection against rising prices to some degree, and hence a great rotation from bonds to stocks that has been predicted for years may be around the corner.

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