Sharpest sharemarket correction in history seen by many as a buying opportunity.

One of the biggest stories from the extraordinary sharemarket response to COVID-19 has been the rise of the “Robinhood” investors in the US. 

These novice investors are actively trading with their newly found free time and government stimulus cheques, often on margin (borrowed money), in speculative and highly volatile stocks, and instruments such as derivatives. 

There has been some attempt to paint a picture of similar developments in Australia – a swathe of new investors trading for the first time.

Although it’s true that investors have responded differently to COVID-19 than to previous crises, concerns about novice investors trading away their life savings appear to be unfounded.

When the S&P/ASX 200 Index peaked in late February 2020, many investors feared that the “most hated bull market in history” was nearing its end. Investors were concerned that weak economic growth and anaemic consumer sentiment would drag on corporate earnings. 

The clearest sign of investor concerns at nabtrade was a swing to net selling, and a steady climb in the cash book (amount of cash investors hold) over two years, to a record high in February. 

As the threat of COVID-19 became more apparent, the cash book grew – but not from selling. Investors started to bring in record deposits from other sources, ensuring they had a ready source of capital if things got interesting.

And get interesting they did. Global markets suffered their sharpest correction in history (although not the deepest). The S&P 500 index in the United States and the ASX 200 fell more than 30% from late February to mid-March. 

The response from retail investors, both on nabtrade and across the market, was overwhelming. 

Far from selling their shares in a panic, investors started buying aggressively, picking up stocks hit hard by the pandemic in record volumes.

Turnover increased threefold on several days during March and April. Buy orders dominated trades. Investors flooded into traditional blue chips such as banks, but also travel companies, buy-now-pay-later stocks, supermarkets and discretionary retail. 

New investors also drove volumes. Applications to open a nabtrade account increased 500% in March, and 300% in April, and Google searches for “how to buy shares” skyrocketed. 

Regulators and commentators raised concerns about the potential for speculation, but the top-five stocks buys among new investors in March were the big-four banks and ASX 200 Exchange Traded Funds (ETFs), demonstrating a relatively conservative approach to share investing. 

Two key trends at play

Trend one is that retail investors, despite contrary concerns, did not indulge in panic selling. 

With no meaningful sharemarket correction since the Global Financial Crisis over 11 years ago, it was feared that investors would not be able to stomach serious share-price falls, and would sell at the lows. 

Also, record low sharemarket volatility in recent years could have led investors into a false sense of security. Instead, they sold relatively little of their shares.

The latest ASX Australian Investor Study, undertaken by Investment Trends in early 2020, suggests that 80% of share investors would now be willing to hold through a sharemarket downturn, up from 74% in 2017. 

The second trend is investors are not just willing to hold in a correction; many now see a market downturn as an opportunity.  

Of the 80% who said they would not sell as the market fell, 12% said they would invest more, as share prices were lower, up from just 5% three years ago. 

Trading patterns from 2020 suggest this finding may be understated.

“Buying the dip” strategy in favour

Although I’ve described retail investors as “contrarians” for a few years now, given the obvious habit nabtrade clients have of “buying the dip”, it was still astonishing to observe the speed and enthusiasm they showed for buying cheap(er) shares during March, April and May.

As the sharemarket has rebounded, and fewer bargains have emerged, investors have moderated their behaviour. Trading volumes have dropped. Cash balances are climbing again. 

High-net-worth and experienced investors have taken profits in shares that have bounced strongly. Many investors hope another dip will present new opportunities and that they have plenty of “dry powder” (available cash) to respond.

Extraordinary sharemarket movements of 2020 may never be repeated. The ASX 200 remains 1,000 points off its peak, but is still up nearly 40% from its lows. In the US, the S&P 500 and the Nasdaq indices are reaching fresh highs. 

Those who bought during the sell-off have enjoyed gains in many cases. For new investors, it is possible this may lead to overconfidence or unrealistic expectations of future returns. 

For those who have seen similar, if less extreme, market gyrations before, these gains are a windfall. 

Either way, retail investors have responded astutely to the sharemarket so far in 2020. Their confidence reflects far greater maturity than a Robinhood scenario might have illustrated.