The Fed’s ‘clarity’ on its aggressive path of rate hikes has reignited risk appetite among retail investors, research firm says

• Retail investors have sprung into buying mode after the Fed’s hawkish meeting last week, Vanda Research said Wednesday. 
• Purchases of US equities and ETFs rebounded to year-to-date averages of about $1.3 billion a day. 
• The buying points to retail investors driving the recent bounce-back in the stock market. 

Retail investors have returned to buying more than $1 billion a day in US stocks and exchange-traded funds, and it appears their appetite for risk has been spurred by the Federal Reserve telegraphing last week that big interest rates hikes are on the way, according to research firm Vanda. 

“[We] see that once clarity on the path of rates hikes emerged, retail jumped back onto their favorite (oft heavily shorted) stocks,” Marco Iachini and Giacomo Pierantoni, senior vice president and head of data, respectively, at the London-based firm said in a note Wednesday. 

“Somewhat surprisingly,” retail purchases of US equities and ETFs have rebounded to year-to-date averages of about $1.3 billion a day following the hawkish Federal Reserve Open Market Committee meeting. 

Through Tuesday, the S&P 500 had climbed nearly 6%, and the Nasdaq Composite had gained 8.9% since the Fed’s meeting wrapped up March 16. Policymakers led by Chair Jerome Powell raised the key interest rate by 25 basis points and suggested six more rate increases are due in 2022. The indexes and the Dow Jones Industrial Average last week each posted their best weekly performances since November 2020. 

The firm said it’s “quite unusual” to see strong retail buying during an equity rally of this magnitude as individual investors are normally contrarian. Vanda said despite rising Treasury bond yields and concerns about an economic growth slowdown stoked by the Fed’s rate-hike plans, the contrarian bid was having a greater near-term influence on equity markets while institutional investors’ speculative positions were light.

The increase in retail purchases suggests that institutional investors were likely at first hesitant to chase the rally while market makers “mechanically bought equities” as the market approached and moved past quadruple witching on March 18. That event marks the simultaneous expiration of single stock futures, stock-index futures, stock options, and stock-index options. 

“This could explain the unusual divergence between the move in rates (prices down, yields up) and growth stocks (up),” said Vanda. 

Aggregate and tech retail purchases strongly rebounded after slumping before the Fed meeting. The median retail investor “participated in this quarter-end gamma reset via high-beta, heavily shorted names,” such as marquee meme-stock AMC, financial services platform SoFi, sports betting company DraftKings, and hydrogen fuel cell maker Plug Power.