How retail investors are responding to a bear market

After the longest bull market in history and record low volatility for several years, many felt investors may have been lulled into a false sense of security. The aggressive turnaround in market fortunes in 2020 has seen a 5 fold increase in volatility; at nabtrade we have seen a 300% increase in share trading volumes, and a 500% increase in new investor applications. Clearly retail investors have responded to the sharpest bear market on record, followed by another bull run of surprising speed; is this enormous increase in activity wise or worrying?

In short, investors appear to have been waiting for a correction, and see this turnaround as an opportunity rather than a threat. The clearest sign that investors were not completely convinced by the market’s record highs was increasing levels of cash. SMSF trustees have been slowly reducing their heavy exposure to cash and term deposits, but still hold over 20% of their portfolios in secure, low rate deposits. nabtrade investors have actually been accumulating cash over the last five years, as rates fell, indicating that they were waiting for better buying opportunities than the sharemarket (or other asset classes) offered them.

The sharp fall in share prices precipitated by the Covid19 crisis has helped us understand what all that cash was waiting for. Instead of selling as prices fell, as many pundits predicted, we saw a swift swing to the buys on nabtrade, after weeks of profit taking through reporting season in February. This buying continued throughout March and early to mid April. Investors bought heavily in bank shares, which are now down approximately 45% from their highs, and continued to buy despite the deferral or reduction of dividends. They also bought enthusiastically in hard hit travel stocks, including Qantas, Flight Centre, Webjet and Sydney Airports. (Virgin, thankfully, was not among the popular buys and has only a very small number of shareholders in the nabtrade investor base). Many investors were keen to cash in on lower share prices but didn’t have a strong view on which stock to buy, which led to aggressive buying in ASX200 and S&P500 ETFs (listed in Australia).

Despite all the buying, investors were clearly open to the possibility that further falls are to come. The cash book continued to increase throughout March and April, despite the buying, meaning that investors were bringing cash from other sources to ensure they could move quickly in the event of future share price falls in preferred stocks. In addition, Betashare’s three bear fund ETFs, offering a positive return when the ASX and S&P500 fall, were extremely popular. In fact they pushed the ASX200 ETFs which usually dominate ETF purchases off the top spot.

Spectacular falls in the price of oil (including an overnight collapse into negative territory for futures) led to large buys in oil ETFs, both in Australia and the US, and companies leveraged to the oil price. This has only slightly abated as volatility has dropped.

Other sectors that had previously been popular include the Buy Now, Pay Later space; Afterpay has been in nabtrade’s top 10 stocks for several years. After its heavy falls, investors bought the stock, but gladly took profits following the announcement of Tencent’s $300m stake. Zip Co and SplitIt, having previously been very popular, fell out of the popular buys and were replaced by PushPay.

The recent rally, delivering the market’s best month in several decades, clearly concerned some investors. There was a slight swing back to the sells in the last week of April as investors took profits in companies that had had significant share price increases. The 5% drop on the first day in May brought the bargain hunters out again, however, further confirming the contrarian investing approach taken by the average investor.

Investors buying US shares directly have taken a slightly different approach; while still enthusiastic for value, they continue to prefer high flying tech stocks such as Microsoft and Apple. As the Nasdaq is actually up in calendar year 2020, this part of the market appears to have weathered the Covid19 crisis much better than others. Berkshire Hathaway continues to be popular, as does Tesla, despite its volatility.  Particularly intrepid investors have been buying battered travel and cruise companies including Carnival Cruises and Royal Caribbean.

Many share market gurus tout the benefits of contrarian investing. Warren Buffet’s famous line about being fearful when others are greedy and greedy when others are fearful is one retail investors have committed to memory. Despite concerns about retail investors selling at the worst possible time or buying at the peak, it appears they have the confidence to buy in a falling market, and take profits in a bull run.

Any statements as to past performance do not represent future performance. Any advice contained in this Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.