After months of selling, institutional investors became net buyers of stocks in August, indicating that the market's biggest players are targeting sectors most likely to benefit from the Federal Reserve's expected interest rate cuts.
Institutions bought a net $6.82 billion in stocks through August, while still averaging $17.62 billion in net selling per month over the past 12 months, according to the latest S&P Global Market Intelligence data. August was the first month that institutional investors were net buyers in equities since December 2023, when they bought a net $6.30 billion on the month.
Institutions sold a net $6.92 billion of stocks in July and sold a net $146.90 billion through the first seven months of 2024, but became buyers in early August when markets slid on a weaker-than-expected US jobs report.
"After significant outflows in July, institutional investors reversed course as economic uncertainties began to ease," said Thomas McNamara, a director for Issuer Solutions with S&P Global Market Intelligence.
Institutional investors in August became net buyers in five of the market's 11 sectors, increasing their exposure the most in real estate and healthcare. This suggests that institutions are focusing on specific sectors rather than the broader stock market, potentially in anticipation of the Fed's forthcoming rate cuts, McNamara said.
"August could mark a turning point for institutions, which appear to be identifying specific buying opportunities in the market," McNamara said. "With a longer investment horizon and the potential for multiple rate cuts starting in September, they might be positioning for a longer-term market upswing."
Hedge fund flows
In contrast to what McNamara called a "disciplined approach to long-term growth despite headline noise" by institutions, hedge funds reacted to headlines, selling a net $11.90 billion in the first week of August alone.
Hedge funds divested nearly $22.44 billion in stocks in August, well above the net $8.39 billion they sold in July and the $149 million in monthly net selling they have averaged over the past 12 months, the data shows.
"Hedge funds have shown considerable volatility in their trading patterns this year, resulting in relatively flat capital flows despite high activity levels," McNamara said. "This suggests they are reacting more to headlines than to fundamental changes."
Retail investors
Retail investors sold a net $19.35 billion in stocks in August, down slightly from the net $20.72 billion sold in July. Retail investors increased their selling in the communication services and information technology sectors the most in August, but were sellers in 10 of the 11 sectors, increasing their exposure only in consumer discretionary.
