Quarantined investors create ‘perfect storm of stupid’ (Plus, a TSX stock skyrocketing on the shift to remote working)
Almost 800,000 bored Americans have opened online trading accounts in what Business Insider’s Linette Lopez describes as ‘a perfect storm of stupid.’
Ms. Lopez points to trading activity in pharmaceutical developer Moderna Inc. as proof that these newbie traders don’t know what they’re doing. On May 18, Moderna’s stock jumped 26 per cent on news that the company’s coronavirus treatment had produced successful results.
In the following days, however, it was noted that the drug trial was far less encouraging than the initial information release implied and the stock fell back ten per cent. “No one did their homework, and no one has since apologized”, writes Ms. Lopez, and adds, “ I have an extremely active subconscious, and I could not have dreamt of a more perfect condition for separating investors from their money if I tried.”
Goldman Sachs analyst Ben Snider has also noted the trend in higher stock trading. In a May 21 report, Mr. Snider charted the sharp jump in S&P 500 equity positions at U.S. online trading firm Robinhood Markets Inc. The number of positions surged from just over four million when the market bottomed in late March, to the current 12 million.
The new traders that aren’t buying and selling ETFs are almost certainly focused on the obvious individual names with strong price momentum like Amazon.com, Facebook Inc., Alphabet Inc., Microsoft Corp. and video game developers like Activision Blizzard.
This is all, of course, a recipe for disaster but market history teaches us not to try and time any kind of market top. The self-fulfilling prophecy of new money pushing stock higher, and attracting even more investment assets to a select group of companies or trading strategies can go on for a long time.
The one thing investors can expect from this trend is higher volatility – first upwards, then down – from the S&P 500’s most popular stocks, and likely also for the benchmark as a whole.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Docebo Inc. This stock has more than doubled since wide-scale lockdowns were implemented across the globe in mid-March, as investors seek out names expected to benefit from the sudden shift to working and learning from home. Docebo, an employee-training software company, is officially headquartered in Toronto but more than half of the staff, along with the CEO, live and work in northern Italy. Read more from Brenda Bouw and Sean Silcoff. (For Globe subs.)
The Rundown
Why is the stock market rallying while the economy is in the dumps?
Previous bear markets have played out over long stretches – typically 22 months on average, from peak to trough. This time around, it took the Canadian market 22 days. The disconnect between the negative economic news and markets is disconcerting. Have stocks overshot? Should you bother with bonds? Are dividends dangerous? This Globe story from Tim Shufelt will help you navigate pandemic-roiled markets. (For Globe subs.)
Yields for now are strikingly high but beware that future growth is questionable
The pandemic has weighed heavily on dividend-paying stocks, sending many yields to remarkable heights. As a result, investors can buy a selection of blue-chip Canadian stocks yielding 5 per cent or more right now, a tempting payout next to low-yielding government bonds. But watch out for the risks. David Berman has more on that. (For Globe subs.)
Fundamental retirement planning only needs this small change in the wake of COVID19
Some financial planners call it the cash wedge, others the bucket approach. The basic concept is to have enough cash or safe, liquid investments in your RRIF to cover at least three years’ worth of living expenses. That way, you’ll never have to sell any of your investments at a low point in order to pay for living expenses or to make the minimum annual RRIF withdrawal. Rob Carrick has this story on how to safeguard your retirement. (For Globe subs.)
Many people have written off bonds. Here’s why you shouldn’t
Believe it or not, there is still a case for owning bonds. Even with yields as miserably low as they are right now, bonds can still do things stocks can’t – like buffer your wealth against serious downturns. Ian McGugan on why bonds aren’t dead yet (For Globe subs.)
Here are two U.S.-based ETFs to consider if you’re interested in green bonds
Green bonds are fixed-income securities that are specifically intended to raise money for climate and environmental projects. That’s a lot of money directed toward the environment. So why is it so hard for individual investors to get a piece of the action? Gordon Pape explains. (For Globe subs.)
Are there any stock market bargains to be found? Just maybe
The growing chasm between stock market winners and losers has created an opportunity for investors willing to bet on better times ahead for today’s most beaten-up sectors. It may appeal to bargain hunters who see overlooked potential in humdrum areas of the economy, and worry about how expensive stocks have become in the market’s sexier areas, notably technology. Ian McGugan on where to look for stock market bargains (For Globe subs)
Why bonds aren’t dead yet
Believe it or not, there is still a case for owning bonds. Even with yields as miserably low as they are right now, bonds can still do things stocks can’t – like buffer your wealth against serious downturns. Yet many people now write off bonds as antiques. Ian McGugan has more (For Globe subs)
A guide to helping investors help themselves
John Heinzl compiles a list of some of the most common questions he receives and provides some tips for finding the answers. (For everyone)
Others (for subscribers)
The highest yielding stocks on the TSX, plus risk data
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Executive chair invests over $4-million in REIT yielding over 9%
High and higher: Why lofty stock valuations are set to keep going up
Ask Globe Investor
Question: Why have Brookfield Infrastructure Corp.’s shares (BIPC) been outperforming Brookfield Infrastructure Partners LP’s units (BIP.UN) by such a wide margin recently? I thought they were expected to trade at similar prices.
Answer: That’s what I thought, too. After all, BIPC and BIP.UN are paying the same quarterly dividend/distribution of 48.5 US cents per share/unit. The only difference is how the amounts will be taxed, with BIPC’s dividend qualifying for the dividend tax credit whereas BIP.UN’s distribution has typically included foreign dividend and interest income, capital gains, return of capital and other sources.
In the weeks after the March 31 unit split that created BIPC, the new shares traded closely in line with BIP.UN. But more recently, BIPC has zoomed ahead. BIPC closed Friday at $60.53 on the Toronto Stock Exchange, compared with $56.34 for BIP.UN.
Why the divergence? Well, some investors with non-registered accounts may be selling BIP.UN and buying BIPC to benefit from the dividend tax credit. (Recall that the company is allowing investors to exchange their new BIPC shares for BIP.UN units, but not the other way around.)
Also, some institutional investors that were unable or unwilling to own Limited Partnership units may be acquiring BIPC shares, further pushing up the price. U.S. investors, in particular, are “buying BIPC in a big way,” Frederic Bastien, an analyst with Raymond James, said in an e-mail.
A premium for BIPC is warranted, Mr. Bastien said, citing the dividend tax credit, demand from U.S. institutions and BIPC’s small share float relative to BIP.UN’s. Mr. Bastien is “not sure where the spread [between BIPC and BIP.UN] ultimately settles at, but it is reasonable to assume one will remain,” he said.
It’s worth noting, however, that BIP.UN’s lagging price means that it now offers a higher pretax yield than BIPC. Based on an annual distribution of US$1.94 converted into Canadian dollars at the current exchange rate, BIP.UN now yields 4.79 per cent, compared with BIPC’s yield of 4.46 per cent. Whether that yield premium will be enough to entice more buyers into BIP.UN remains to be seen.
--John Heinzl
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