The equity markets have recently been tranquil and very friendly to investors, reaching new highs and registering low volatility. The length of time since a significant decline in the S&P 500 has been unusually long. Just like an extended period of good weather changes our behavior and outlook, the tranquil markets may be related to shifts in investor behavior. Is this a blessing or a curse? It depends on one’s point of view.

Signs Of This Regime Change In The U.S. Stock Market

Signs of the shift in investor behavior are all around us. The attention in the financial press has been focused on the shift from active to passive management, but another even more significant change is occurring under the surface of equity markets—a shift to long-term investing. The tactical, risk-on/risk-off investors that dominated the financial marketplace since the financial crisis are fading into the woodwork. The reverberations of this shift have caught exchanges and some brokers off guard. They are facing reduced commission revenues as trading activity has plummeted. Some high-frequency trading firms have had falling revenue and profits, leading to mergers and exits from the business. Among the beneficiaries of this shift have been public companies who are thrilled to have fewer stockholders focused on short-term earnings and who face less concern that their stock will be whipsawed by trading flows linked to “macro” events. The quieter and slower pace of trading also means that long-horizon investors are seeing less overall market noise (and lower short-term volatility) from tactical flows.

Lower Levels Of Trading Activity

As mentioned above, the two primary signs of a lengthening of investment horizons are lower index volatility and lower levels of trading activity, especially for ETFs. One way to measure how long investors hold equity positions (turnover) is to examine the ratio of the market capitalization or value of all stocks to the amount of daily trading activity. The higher this measure, the longer the holding period, which means the stock of equity capital is not turning over as frequently. This year, stocks have been rising in value, with the S&P 500 and other indexes reaching record highs. At the same time, the average volume of U.S. stocks traded has declined 8 percent (as of the end of September), according to Credit Suisse Trading Strategy based on Bloomberg data,, which means the average holding period for stock positions is increasing and turnover is falling.

Even more significant, ETF trading for the first three quarters of 2017 is down 25 percent from the same point a year ago. Within these ETF trading statistics, we are also seeing a shift away from broad-based U.S. equity ETFs toward more trading in sector, international and fixed-income ETFs (Op. cit.). This sizable slowdown in ETF trading has come in the face of huge inflows into ETFs, with $385 billion of net flows into ETFs through October of this year, over $100 billion higher than the $288 billion of flows in all of 2016, according to These large ETF flows have been coming more from longer-term investors, such as individual investors, financial advisors and registered investment advisors (RIAs), who now represent larger components of the investment community relative to hedge funds and active asset managers. Index managers like Vanguard and BlackRock, popular asset managers for these long-term investors and for 401k plans, have seen their assets swell. 

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