New research offers a possible explanation for why daily share volume in U.S. equities has fallen 31 percent since the financial crisis: money managers are popping in and out of stocks less often.
Turnover in mutual funds, or the proportion of shares that enter and exit each year, is hovering at around 45 percent, close to the lowest level on record in data starting 12 years ago, according to Credit Suisse Group AG. The reading peaked at 62 percent in 2009, coinciding with the busiest year of equity trading.
Funds are getting in and out of shares much less than before as stabilization in the economy and the market reduces the need to switch positions, according to Russel Kinnel, director of manager research at Chicago-based research firm Morningstar Inc. Stock volatility is falling as central bank stimulus and earnings expansions have propelled a six-year bull market, with the Standard & Poor’s 500 Index rallying more than 200 percent.
“It’s a natural outcome of a huge change in the market fundamentals,” Kinnel said by phone. “Both 2008 and 2009 were jarring years and naturally you’d have more turnover. The economy and corporate landscape has generally become more predictable.”
Another reason for declining volume is the rally itself. As stocks rise in price, more money is required to buy or sell the same number of shares. As a result, while unit volume is down from 2009, the overall value of stocks traded each day has risen.
Anemic trading from stocks to bonds has curbed profit for exchanges such as Nasdaq OMX Group Inc. and banks like Goldman Sachs Group Inc. that get commissions for making markets for securities. From retail investors abandoning equities to Wall Street firms shutting down proprietary trading, Credit Suisse’s study on the fund industry offered another piece of the volume puzzle.
Turnover in mutual funds has averaged 53 percent since 2002 and the ratio has been stuck below the mean in the past four years, falling to a record low in 2014, data compiled by Credit Suisse show.
When the churn rate was around 45 percent from 2012 to 2014, U.S. stock trading was capped below 6.5 billion shares a day. While volume rose to about 6.7 billion shares this year, that’s still 31 percent lower than the daily average of 9.8 billion in 2009, data compiled by Bloomberg show.
“Turnover has been declining since late 2009,” Lori Calvasina, Credit Suisse’s chief U.S. equity strategist, wrote in a note published Tuesday. “We have struggled to understand why, but think it helps to explain why volumes have been poor.”