Wall Street Surge Amateurs

The Wall Street surge fueled by amateur investors flush with $267 billion in stimulus checks is coming home to roost.

Easily spooked, these amateur investors have triggered a massive sell-off in the markets reflected by a rough week and overall month on Wall Street. For the week the Dow is down more than 700 points and more than 1500 points for the month.

Stimulus checks and stay-at-home orders created massive interest in day trading. Amateur investors by the millions flocked to Wall Street hoping to get a piece of a potential market comeback.

The proof was in the record number of new account sign-ups with online brokers. Charles Schwab, TD Ameritrade, Etrade, and Interactive Brokers all saw record new sign-ups, while millennial-favored Robinhood, which offers free trading, saw a historic 3 million new accounts in the first four months of 2020.

Little did these amateur investors know, but they would be the ones artificially bolstering Wall Street. The stock market surge was not the type of comeback that was based on underlying economic fundamentals. GDP was still down and unemployment was still high.

Investing with their emotions, these amateur investors drove the stock market to new heights, but just as emotions and excitement fueled the surge, emotions and anxiety would trigger a sell-off.

So what triggered the sell-off? Take your pick:

  • Tech stocks favored by these amateurs such as Amazon, Apple, Netflix, and Tesla saw huge surges in the summer but they were overvalued – more than any sector. And the taller they are the harder they fall and tech stocks have seen the biggest declines.
  • No new stimulus plan from bickering lawmakers means dampened consumer sentiment this holiday season.
  • An already nasty and contentious political season just got more fuel poured on the fire with the impending fight over a Supreme Court nominee to replace Justice Ruth Bader Ginsburg.
  • The surge in COVID-19 cases with the opening of businesses and schools weighed on investors’ minds.

The September selloff came as no surprise to the many experts who had been predicting this for months.

The economic impact of the COVID-19 outbreak and subsequent lockdowns was swift and terrible. The unemployment rate skyrocketed and the stock market shed more than a third of its value in March.

But a curious thing happened once the first round of stimulus checks started showing up in people’s bank accounts back in April. The stock market started an unprecedented surge that saw the Dow break the record for its intraday high in August. The previous record was set back in February before the pandemic.

The problem with this Wall Street rebound is that it was not based on any strong underlying economic fundamentals and it happened too fast too soon.

This all pointed to the stock market being way overvalued. Compare this stock market recovery with previous crash/recovery cycles. In every previous stock market crash/recovery cycle, recovery was often slow and there were always positive underlying economic fundamentals fueling the recovery.

For example, it took 8 years for the Dow to recover to previous levels after the dot-com bubble burst in 2000. Then following the crash of 2008, it took about 6 years for prices to recover to the previous all-time high.

After hitting an all-time high in February of this year, the Dow Jones nearly reached that mark in August fueled by a surge in retail investor trading. This latest recovery took only SIX MONTHS after crashing in March.

Something did not sit right with this latest stock market recovery. Why was Warren Buffett liquidating stocks and sidelining cash?

In early September, so-called bond king Jeffrey Gundlach, CEO of DoubleLine Capital, had this to say about the surge in the stock market.

“This is a terrible sign for the condition of the market for anybody who’s experienced a significant number of cycles, which I’ve experienced,” Gundlach said.

Many experts are warning investors to stay away from the stock market. 

Amateur investors have made it way too volatile and overvalued.

How so?

For one, these amateurs are picking up penny stocks and stocks of companies who have filed for bankruptcy with reckless abandon. The result? Stocks that are way overvalued.

Want proof the stock market is overvalued?

Take for instance average price/earnings (PE) ratio, which has been a reliable barometer of stock market value. The PE ratio measures the average of the Dow company stock prices compared to their earnings. A price disproportionately higher than earnings indicates overvalue.

The Dow has historically traded at a PE ratio of 15. By contrast, the Dow is currently trading at a PE ratio near 28 – nearly double the historic average. Stocks are overvalued and a selloff was bound to happen.

It’s curious to see all the hand wringing going on in the public markets over stock selloffs and plunging portfolios. The invasion of amateur investors on Wall Street – like Barbarians running through the streets of Rome – have upended all investing norms. Volatility runs rampant as once difficult to predict has become even less predictable.

Do you know what kind of investors are oblivious to all this market turmoil?

Investors who invest behind a walled garden where the price of entry and accredited investor qualification requirements prevent amateur investors from wreaking havoc.

Inside this private market garden, investors are prevented from harming themselves by imposing long lockup periods on private investments to prevent the type of massive selloffs seen on Wall Street this week and month.

Smart investors choose to invest in private markets with like-minded investors – not only to avoid volatility but also to invest in assets with returns and production that accurately reflect underlying economic fundamentals and not the whims of the masses.