Why did Schwab clients pull back from equities last month even as markets soared?

September can be a challenging month for equities investors, but this year it brought some surprises, not least a jumbo interest rate cut from the Fed.

With several key pieces of economic data too, an analysis of millions of Schwab trading accounts reveals a cautious approach with the firm’s clients ending the four-week period ended on September 27 as net sellers of equities.

The Schwab Trading Activity Index slipped by its biggest margin since June 2022 to rank ‘moderate low’ by historic standards as investors chose to de-risk and seize profit taking opportunities.

“For now, it seems that the market has accepted the proactive framing the Fed has adopted with regards to its policy decision, and in large part we’re seeing that clients are optimistic about the US’s economic prospects,” said Joe Mazzola, Head Trading & Derivatives Strategist at Charles Schwab. “But there’s no doubt that the extent of the rate cut in September caught many by surprise and, taken in combination with all the other economic data swirling during the month, it makes sense that clients pulled back a bit even as the markets soared.”

The dip to 47.10 in September from 53.16 in August while the S&P 500 recovered from a bumpy start is one of the biggest divergences between market performance and the STAX score in the history of the analysis.

The first week of September saw the S&P 500 down by more than 4% (the worst week of 2024 to date) and when coupled with the frequently held view that September is a historically weak month for stock market performance, the cautious behavior of investors is not surprising, even though the market recovered in the second week and ended higher.

The Dow Jones Industrial Average and the S&P 500 hit new highs of 42,628.32 and 5,767.37 respectively in the closing days of the September STAX period while the Nasdaq Composite closed the period at 18,189.17, up 2.68% and within five percent of its all-time-high set in July of this year.

The Fed rate cut and geopolitics is also likely to have informed investors’ decision making and many of Schwab’s clients opted to pivot from equities to fixed income last month.

At a sector level, they were net buyers of Energy and Consumer Staples, while Information Technology, Consumer Discretionary, and Communication Services saw the most selling.

Names in favor included NVIDIA, Palantir Technologies, Intel, Alphabet, and Microsoft, while those most sold included Tesla, Advanced Micro Devices, Alibaba, AT&T, and Nio.