Anyone lucky enough to have enjoyed a long summer holiday and focused on the beach rather than their portfolio might not have noticed the recent jolt in global stock markets.

While the second half of July was a miserable time markets amid fears of a US recession, the scale of the subsequent rebound has been remarkable.

Glance at your portfolio now and you might only see a small dent. There is certainly none of the panic that gripped markets in July, and the VIX measure of market volatility has more than halved since spiking in August.

The S&P 500 index of US shares even registered its best week of the year, rising 3.9% for the five days to 16 August 2024.

While an investor who held their nerve and did nothing with their portfolio might now be glad of their inaction, what about those who felt compelled to transact in their ISA or SIPP because share prices were moving fast?

TIMING THE MARKET

A few nimble-footed investors might have been lucky enough to lock in profits before the sell-off accelerated and then buy back at a cheaper level, but they will be few and far between.

In reality, timing the market correctly is extremely tricky and inevitably some investors will have sold at the height of the market panic and then seen markets rebound and bought back at a higher level. That is not sound investment practice.

To find out how investors behaved during the summer market whirlwind, AJ Bell analysed non-advised customer transactions across the peak to trough (10 July to 7 August) for the Nasdaq Composite, an index of US stocks with large exposure to the big technology names which have helped drive markets in recent years.

Admittedly, this is a brief period, and investors should judge their investments over years not months, but that said the data does provide an interesting snapshot of how investors were thinking during a time of market stress.

RAPID SELL-OFF

The Nasdaq fell by 13% during the sell-off in July and August, a large drawdown in such a brief period by historical standards.

From late 2023 through July 2024, investors had been content with the idea inflationary pressures would ease and lead to interest rate cuts, particularly in the US. This was the idea that ‘good news’ would encourage the Federal Reserve to reduce the cost of borrowing as there was no reason to keep it high.

Most investors probably had not considered a scenario where central banks might have to cut interest rates to revive the economy because businesses were worried, labour markets were weakening and spending from corporates and consumers had waned.

The realisation we might be heading towards a state of peril meant the narrative was flipped on its head, implying ‘bad news’ would drive interest rate cuts.

Stirring investors into a panic during the summer was gloomy economic data which supported this ‘bad news’ scenario.

Between 10 July and 7 August, the biggest number of stocks sold by AJ Bell customers were a mixture of the best-performing shares of recent years, including Nvidia (NVDA:NASDAQ) and Rolls-Royce (RR.); high-yielding UK names which have been staples of many pensions and investment accounts, such as Lloyds (LLOY) and British American Tobacco (BATS); and more speculative names which have been popular among individuals who regularly trade in and out of the market, such as Microstrategy (MSTR:NASDAQ) and Ocado (OCDO).

There is a certain logic behind these stock choices. Faced with a gloomier backdrop, it is natural to think first about locking in gains from shares which have done well, then about trimming positions in names which might represent a large part of your portfolio, and finally stepping away from higher-risk names when the market goes into full risk-off mode.

However, there is a much more interesting story once you delve deeper into the transaction trends. The ‘net buys’ figure aggregates the total number of buys and sells for a particular stock. A ‘net buy’ is when more people have bough the stock than sold it, while a ‘net sell’ is the opposite.

TAKING ADVANTAGE OF CHEAPER PRICES

Two of the most widely-sold stocks during the 10 July to 7 August period were also among the biggest net buys, namely Nvidia and Vanguard S&P 500 ETF (VUSA), a passive fund which tracks specific parts of the US stock market.

The real nugget from the data was the number of people buying these specific stocks was several multiples of those selling in all three instances.

In the case of the Vanguard S&P 500 ETF, six times more AJ Bell customers bought the stock than sold it which implies savvy investors took a long-term view and pounced on the opportunity to buy at a cheaper price.

Fruitful investment decisions can happen when investors go against the crowd and buy when broad market sentiment is weak. This strategy doesn’t always work out, but history suggests it can be a wise move if nothing has changed in terms of the core investment case for a stock.

It takes nerve to deploy more money into the markets when the headlines are negative, but there is merit in forming an investment plan and sticking to it.

‹ Previous2024-08-29Next ›