Bloomberg just published an article challenging the traditional notion that institutional investors represent “smart money” whereas retail investors are hapless. The article is based on data collected by State Street showing the equity weighting of a large universe of institutional investors.
First, note that institutional equity exposure peaked just before the tech bubble popped in 2000 and again on the eve of the Great Financial Crisis. In contrast, exposure was at a low point when stock prices reached troughs in September of 2002, February of 2009, and March of 2020. I think it is supposed to be the other way around. In all fairness, the low level of equity exposure near market bottoms is partially a function of the market decline, but it seems clear that institutional investors are not immune to fear and greed like all of the rest of us.Bloomberg points out that institutional equity weightings are only now reaching pre-Financial Crisis levels whereas retail investors have fully participated in the roaring markets of recent years.
The article raises an interesting question. If institutions rather than retail investors represent the ultimate contrarian indicator, does the fact that institutional equity weightings are once again at a high level mean that the stock market is near a top? Since that question is unanswerable, I pose a different query: who is the “smart money?”