The S&P 500 Index (SPX) index has soared 16% this year and is now within range of new record highs along with other benchmarks, but trading volume has been slipping. This is taken as an indicator of diminished investor confidence, according to some observers. Indeed, the average daily trading volume on the New York Stock Exchange (NYSE) and Nasdaq during the week ending April 12, 2019 was the lowest since the end of Aug. 2018, per statistics from Dow Jones Market Data cited by The Wall Street Journal.
“This is a very expensive market,” as Michael O’Rourke, chief market strategist at JonesTrading, told Bloomberg. “A lot of this rally is policy-driven because of the Fed pivot, so I have a hard time thinking it will be sustained throughout the year. If it’s me, I’d be taking profits," he added. The table below shows how far the major U.S. market indexes have advanced in 2019.
Stocks Poised for New Record Highs
(YTD Gains Through April 12, 2019)
Source: Yahoo Finance
Significance For Investors
Uncertainty about the outcome of U.S.-China trade negotiations, conflicting signals about the prospects for continued economic expansion, and stalling corporate earnings growth are among the top reasons for hesitancy about stocks right now, according to the Journal. As a result, not only are equity trading volumes down, but there also continues to be a net outflow of investor money from equity mutual funds and ETFs, per fund tracking service EFPR Global, the article adds.
In its latest monthly activity report, online brokerage firm E*Trade Financial Corp. (ETFC) indicates that its daily average revenue trades (DARTs) in Feb. 2019 were up by 6% from January, but down by 10% from their previous high in Feb. 2018. For TD Ameritrade, February also is their most recently-reported month, with average trades per day slipping since January, and also falling sharply from their own previous high in Feb. 2018, per that company's monthly metrics.
Diminished trading volumes are also a source for concern because they can lead to increased stock market volatility, producing wider price swings. Indeed, a number of observers see declining liquidity as a growing threat to the market which is bound to exacerbate future selloffs.
The earnings reporting season for the first quarter of 2019 is getting underway, and investors may be on the sidelines until they see the direction of corporate profits, which are widely expected to be headed downwards. “There’s a lot of folks waiting to see what the real deal is," as Jay Pestrichelli, CEO and co-founder of Florida-based investment management firm ZEGA Financial, told the Journal.
Given the uncertainties of the current market environment, the latest U.S. Weekly Kickstart report from Goldman Sachs recommends that investors look to stocks that fit one or more of these themes: low operating leverage, low labor costs, or high dividend growth. Investopedia recently looked at stocks in Goldman's low operating leverage basket, dividend growth basket, and low labor cost basket.