Retail investors can’t be blamed for joining stockmarket rollercoaster

Investors can’t be blamed for getting excited by the prospects opening up on the stockmarket as Wall Street pushes higher.

Investors can’t be blamed for getting excited by the prospects constantly opening up on the ASX as Wall Street moves broadly higher. Picture: AFP

The market regulator has taken the unusual step of warning investors to be careful trying to make “quick profits” from our rollercoaster stockmarkets.

But investors can’t be blamed for getting excited by the prospects constantly opening up on the ASX as Wall Street moves broadly higher.

The month of April saw the ASX lift 8.8 per cent, the biggest monthly jump in more than 20 years.

Who is to say May will not offer similar returns?

Whether or not this market reverses again is not the point. Of course there will be setbacks, but turnover among stockbrokers recently doubled as retail investors jumped in to ride the sharemarket higher.

What explains this optimism? How can markets lift if the economic news is so dreadful?

With the ASX 200 level near 5400, we are well up from the panic-driven early days of the pandemic crisis and on a technical basis close to shrugging off a “bear market”.

What’s more, investors are showing a useful level of discretion — they are not “buying everything”, far from it.

Healthcare, technology and mining — three sectors with strong fundamentals — are carrying the market higher, while the weaker sectors are being left behind such as retail and banks.

A key to the action is the theory that there is “nowhere else to put your money” but the sharemarket. Bonds offer little, cash offers less.

Economically, core inflation has generally been low, treasury yields are low and monetary policy is experiencing another round of easing.

Adding real spice to the mix is the sense that the market is six to nine months ahead of the economy. In particular, with the Trump administration winding down the US “pandemic task force”, it has now formally put Wall Street as a top priority.

On closer reading, the statement from regulator the Australian Securities and Investments Commission was primarily focused on notorious day-trading speculators, along with players in the CFD (contracts for difference) market, where inexperienced investors are regularly warned of the dangers.

But the ASIC warning could be applied in general. Everyday investors — rather than traders — are being forced to engage with the ASX whether they like it or not due to a blitz of capital raisings that demand decisions be taken. NAB’s capital raising alone involves more than 570,000 individual investors.

For these investors, the more targeted caution may be that though the reasons share prices are rising are clear, the underlying economy still offers very little clear support, and under those circumstances we could have a serious sell-off at any moment.

The fodder for bears is everywhere — earnings guidance is removed from the majority of key companies in the market, and dividends are being cut or deferred.

A recession is looming. Earnings in this quarter will be smashed left, right and centre.

Perhaps a refresher course in the market recovery post-GFC might be useful.

After the dramas of October 2008, we enjoyed a brief bull market from December 2008 to January 2009. Stocks jumped about 27 per cent in 30 trading days.

And then in the first quarter of 2009 investors lost confidence and we had hell again as the ASX sunk to a full 50 per cent top-to-bottom slump by March. Let’s hope history does not repeat this time round.