While the US stock market continued to reach record highs in September, a clear divide emerged between retirement savers and retail traders.
Two separate data bundles showed 401(k) plan participants moved decisively toward safer assets, while individual investors increased their exposure to equities.
An analysis by Alight Solutions, which tracks the trading activity of more than 2 million 401(k) plan participants with over $200 billion in assets, found that investors overwhelmingly moved money out of stocks and into bonds and cash during September.
Trading activity was generally subdued, but when participants did make changes, they “moved from equities to fixed income.”
“There’s this flight to bonds, money market and stable value [funds],” Rob Austin, head of thought leadership at Alight, told CNBC.
On 20 out of 21 trading days in September, net flows favored fixed income options such as bond funds, stable value funds, or money market accounts. These more conservative asset classes accounted for 82% of all investor inflows during the month.
Bond funds attracted 39% of new money, while stable value and money market funds drew 25% and 18%, respectively. By contrast, large-cap US stock funds saw 38% of outflows, with company stock and small-cap stock funds also experiencing significant drawdowns.
Alight’s analysis did not identify a single cause for the shift, but Austin suggested at least some investors may have been reacting to economic uncertainty.
Among the headlines in September were ultimately-realized fears of a government shutdown and ongoing signs of weakness in the job market, factors that may have prompted some to “tighten their belts,” he said. He added that the move from equities to fixed income “could hint at some hedging against market volatility.”
Despite the shift, the overall allocation to equities in 401(k) portfolios actually ticked up slightly, rising from 72.9% in August to 73% in September, reflecting the impact of market gains. However, new contributions to equity allocations edged down to 70.2% from 70.3% the previous month.
Financial advisors have long cautioned against trying to time the market, warning that it can lead to poor outcomes, such as selling at the bottom and missing out on rebounds.
“Keep in mind that nobody can really time the market well, and it’s best to have a long-term focus on what you’re trying to accomplish,” Austin said.
There may be another explanation for the shift: with the S&P 500 up about 13% for the year as of late September, some investors may have been rebalancing their portfolios to avoid becoming too heavily weighted in stocks, Austin suggested.
In contrast to the caution among retirement savers, retail investors tracked by Charles Schwab continued to buy stocks in September, according to the Schwab Trading Activity Index for the month.
The index, which measures the behavior of millions of Schwab clients, rose to 46.12 in September from 43.69 in August, indicating that clients were net buyers of equities and increasingly branching out beyond the so-called Magnificent Seven tech stocks.
“The reign of the Magnificent Seven may not be over, but in September we saw Schwab’s retail clients branch out from those traditional names and into higher-volatility, AI-adjacent stocks,” said Joe Mazzola, head trading and derivatives strategist at Schwab.
He noted that September brought several first-time entrants to the firm’s top 10 most-bought list, suggesting clients were “seeking additional upside from a market trading at all-time highs.”
Schwab clients’ appetite for equities was buoyed by factors including a mid-month rate cut from the Federal Reserve, lighter-than-expected inflation data, and resilient retail sales.
Even as the threat of a government shutdown loomed late in the month, retail investors’ confidence appeared undiminished, with the strongest weekly gain in the index occurring during the final week of September.
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