Spooked Participants Flee Into Inflated Fixed-Income

August 2019 proved to be the 19th month in a row during which net 401(k) trades have flowed from equities into fixed income, according to the newly updated Alight Solutions 401(k) Index.

Followers of the index will know that when equity market become volatile, the index tends to see trading activity spike towards fixed-income. Index data shows this has certainly been the case to-date in 2019.

At the start of the year, as the market had been going up from early year lows, people had mostly been selling out of equities and into fixed income. This represented the “correct” trading behavior of buying low and selling high. However, the second half of the month of October brought renewed volatility in U.S. and global equity markets. After several weeks featuring relatively large price swings for major indices including the DJIA, S&P 500 and the NASDAQ, 401(k) trading activity towards fixed income jumped on Monday, October 29. That day, trading was 2.26-times the normal level, according to the Alight Solutions 401(k) Index.

Then, on August 5th, the index again reported a high level of trading activity—2.78-times the normal level—towards fixed income. The trading spike came after a two-day drop in the S&P 500 of nearly 3.7%. At the time, Rob Austin, vice president and director of research for Alight Solutions, told PLANSPONSOR the spike in trading activity was about as surprising as it was well-timed.

“The money was going out of depressed equities and into inflated fixed income,” Austin explained. “So, it’s disappointing.”

Now that Alight Solutions has published the full August numbers, the extent of the trading towards fixed income is clear. Overall, 16 of 22 trading days in August favored fixed income funds. Net trading activity for the month was the highest in 2019, at 0.24% of balances. Additionally, there were six above-normal days, the highest monthly total since December 2018. 

Important to point out is the fact that these (likely ill-timed) trades are still occurring in a small fraction of accounts. The average day of trading as measured by the Alight Solutions 401(k) Index is 0.016% of balances trading per day.