The U.S. stock market has seen a strong rebound recently, with the S&P 500 rising 14% in just one month. This surge has been primarily driven by retail investors actively buying stocks, rather than institutional investors. In fact, institutions have largely withdrawn from the market due to concerns over slowing economic growth and trade tensions.
Retail investors have net bought stocks for 21 consecutive weeks, the longest streak since 2008. In contrast, institutions are finding themselves in an awkward position, being “squeezed” by the market’s rise. Many are now reconsidering entering the market in the face of the ongoing rally.
“This market is exhausting,” said Ken Mahoney, CEO of Mahoney Asset Management. His firm currently holds about 40% cash but has begun buying some relatively undervalued software stocks due to the market’s aggressive climb. On the other hand, retail investors like Jay Rice, a 64-year-old former Wall Street broker now day trading in Arizona, are actively investing in tech giants like Nvidia and Amazon.
“When the market is this turbulent, trading is indeed more difficult, but I like this state,” Rice said. “Trump’s erratic trade threats may make things very difficult, but I’m still buying.”
The continuously rising market seems to be forcing institutions to reconsider their positions. Colton Loder, head of management at alternative investment firm Cohalo, noted: “This is an unpopular rebound.
Retail investors drive market rebound
But simply based on the significant reduction in positions, it is very likely to trigger buying in the coming weeks, regardless of news regarding trade or monetary policy.”
The market’s technical aspects also appear to be supporting this trend. Significant declines in volatility have increased the pressure for institutions to cover their positions.
According to data from Tier 1 Alpha, the one-month actual volatility of the S&P 500 index dropped by 17 points on Thursday, as the historic 9.5% rebound on April 9 was excluded from the one-month calculation. This decline in volatility will allow investors to increase their market exposure. Despite facing pressure to cover positions, the core concerns of institutional investors have not been alleviated, with the primary one being the uncertainty surrounding the Federal Reserve’s monetary policy path.
Wall Street had previously anticipated that the Federal Reserve might cut interest rates next month, but Fed Chairman Jerome Powell and other policymakers have emphasized the need to wait for clearer economic data before making judgments. Stephanie Lang, Chief Investment Officer of wealth management firm Homrich Berg, expressed caution: “You can’t always chase these kinds of rebounds.” She prefers to focus on defensive companies with improving profit prospects, such as those in the healthcare and utilities sectors. Dennis Debusschere, founder of 22V Research, views this rise as a “fading rebound” and points out that tariff issues remain a significant risk.
Technically, the S&P 500 index is still 7.9% lower than its historical high on February 19. To reclaim the key upward trend line that began in October 2022, the index needs to rise above 6000 points, which Cohalo’s Loder believes is undoubtedly a more challenging task. “We just want to get through all of this safely,” Mahoney’s words may reflect the common sentiment of many institutional investors currently caught between the retail frenzy and market uncertainty.
“Anything can change in an instant due to a tweet.” In such a highly sensitive and uncertain market, the awkward and difficult situation faced by institutions “squeezed” by retail investors is likely to persist in the short term.
