Against increased geopolitical uncertainty spurred by issues such as the U.S.-China trade war and Brexit, the variability of returns among individual stocks was greater than the variability of returns across stock market sectors during the first quarter of 2019, according to analysis by Bank of America Merrill Lynch, as reported by The Wall Street Journal. During most of the period from 2012 through 2018, the opposite was true, making the choice of index or sector of paramount importance to many investors. Now the tide has turned.

"You used to make more money being in the right sectors than the right stocks generally,” as Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, told the Journal. “Now you’re making more being long one stock or short another," she added. The table below summarizes the turnaround among individual investors who are clients of BofAML's wealth management division. They collectively have about $2.8 trillion on deposit at the firm.

Merrill Lynch Clients Now Buying Individual Stocks

(Activity Among Wealth Management Clients)

  • They were net sellers of individual stocks, 2008-2017
  • Made net purchases of $22.3 billion in 2018
  • Net purchases of $15 billion YTD 2019 through May 17
  • $40 billion run rate for 2019 (+79% from 2018)
  • Allocation to individual stocks now 40% (was 37% in 2018)
  • Mutual fund and ETF holdings are down

Source: Bank of America Merrill Lynch, per The Wall Street Journal

Significance for Investors

The experience of BofAML is not unique. For example, also per the Journal, clients of online discount brokerage firms E*TRADE Financial Corp. and TD Ameritrade also have been net buyers of individual stocks in 2019. At the former, stocks in communications services, information technology, and energy have been the favorites this year. At the latter, clients were net buyers in January and March, but net sellers in February and April. However, the article adds, the industry lacks comprehensive data on investor moves in and out of individual stocks comparable to the data gathered and reported on mutual funds and ETFs.

In 2018, stocks displayed a high degree of correlation, rising or falling largely in response to news and shifting expectations regarding macro forces such as interest rates and GDP growth, rather than on company-specific results, Subramanian said. As noted above, individual stocks began to move more independently in 1Q 2019, and this, plus lowered valuations in the wake of the Dec. 2018 selloff, contributed to the increased popularity of stock picking among individual investors, she noted.

Goldman Sachs has been encouraging its clients to invest in individual stocks, particularly those that have been moving independently of the market as a whole, among them Twitter Inc. (TWTR), Ulta Beauty Inc. (ULTA), and Monster Beverage Corp. (MNST), the Journal indicates. The year-to-date gains through May 28, 2019 for these stocks are 29.7%, 36.8%, and 26.5%, respectively, versus 11.8% for the S&P 500 Index (SPX).

Looking Ahead

Actively-managed large cap mutual funds are enjoying an uptick in performance in 2019, with 42% beating their benchmarks, compared to a 10-year average of 34%, per analysis by Goldman Sachs. The flipside is that a majority still fails to beat passively-managed alternatives.

Over the past four years, actively-managed funds have seen net withdrawals of $855 billion, while passive funds have enjoyed net inflows of $2 trillion, per data from Morningstar cited by the Journal. It seems that underperforming active managers also are losing assets to individual investors who apparently feel that they can do no worse.