By Eric Johnstone
Wild price swings are less surprising at the smaller end of the sharemarket, where companies tend to be less liquid and attract limited interest from analysts or fund managers. Now, however, the turbulence has spread to Australia’s bigger end. At the same time, the moves at the mid-to-smaller end have become more extreme still.
Results day has always been when the action happens. Yet in this era of continuous disclosure and quarterly updates, the market should be across much of the detail. For the most part, surprises for big companies are likely be modest – even on dividends. Before the Covid pandemic, a 3 per cent-plus move for a top-20 stock was considered a very significant move.
Now the new normal sees big caps trading like bitcoin.
BHP jumped nearly 5 per cent on its results, Commonwealth Bank 6.8 per cent, ANZ 8.5 per cent. Energy major Origin rose 9 per cent and smaller rival AGL 11 per cent. On the downside, large cap Wesfarmers fell nearly 4 per cent while CSL crashed nearly 12 per cent over two days – a period that admittedly included considerable boardroom drama. This still translated into billions of dollars in lost value.
Wilson Asset Management’s lead portfolio manager Matt Haupt says he can’t recall a season like it. Sure, big moves happen in a crisis, but not in a standard half-yearly reporting period.
“Let’s say CBA prints, and yes – it was a good result – but up 7 per cent? On the world’s most expensive bank? It doesn’t make sense. So you are getting all this crowding into a lack of risk,” he says.
Among other moves, Cochlear fell 18 per cent and Pro Medicus 24 per cent. Household names moved sharply too: JB Hi-Fi up 7.5 per cent; Temple & Webster down 30 per cent; the 177-year-old AMP, which thrives on slow-moving, unglamorous financial advice, crashed 26 per cent as it fell short. Zip Co took the honours, losing more than a third of its value in a single session after disappointing. Growth stock Guzman y Gomez saw intraday moves of 16 per cent on Friday alone.
With swings like this is something fundamentally wrong with the market?
Haupt says there’s a perfect storm of external events. This ranges from AI disruption sweeping through software stocks to heightened geopolitical events, such as the US-Iran clash hanging over markets; there’s a shift to a hawkish interest rate outlook; and Australia remaining on the receiving end of a momentum trade. Billions have flowed into the country in recent weeks across key stocks, particularly from index funds. This means more are chasing the safer money.
Banks have steadily been rising over the past year as index funds have piled into the stocks (often causing great pain to hedge funds). As the name implies, index funds tend to hold rather than trade. This illiquidity is only adding to volatility.
“What you’re seeing is everyone getting into a few big names and it’s just making the distortions even greater than normal.”
AI meets HFT
The rise of algorithmic, or high-frequency trading, is undoubtedly adding to volatility. Some estimates put this at more than 65 per cent of trades by volume on the ASX, though this can vary daily.
Yet it is not a new phenomenon – high-frequency trading has operated seriously for more than a decade. Markets have lived with the notion of flash crashes since 2010. Still, some on the receiving end of a big move are wondering whether the overlay of AI programming in the past two years is adding a less predictable and more reactive dimension to trading.
However, AI should theoretically be armed with deeper and more granular information, and therefore capable of making rational choices, including before results are released.
How, for example, does Cochlear’s value plunge 19 per cent from one day to the next based on a tempering to its earnings performance? (Still in range but the lower end). Even CBA’s and ANZ’s earnings stories were well known in the lead-up to their numbers being released. ANZ had clearly communicated its aggressive cost-cutting plan, yet the market was taken by surprise when this began to show in the financials.
Cochlear’s chief executive Dig Howitt has ridden some big double-digit moves during his time at the helm of the hearing-tech company. But he too has noted greater volatility creeping into recent results seasons. On Cochlear’s numbers, he acknowledges the revenue miss, given the translation impact of the strong Australian dollar (more than 90 per cent of Cochlear’s sales are offshore). Secondly, he understands the disappointment over the ramp-up of the new generation hearing implant following its launch mid-last year. Howitt remains confident of hitting targets in the second half, but this could not hold off the storm.
“I think we executed the launch very well, but from the market’s perspective, we were slightly behind where we thought we’d be at the end of the half”.
Tech rout
The backdrop to this rollercoaster has been a significant global selldown in technology stocks, driven mostly by fears about what new AI tools will mean for software companies. It is a case of sell first and ask questions later, with big names such as Atlassian (coding tools), WiseTech (logistics) and Xero (bookkeeping) all being smashed. Atlassian is now off a painful 70 per cent over the past year; Xero is down nearly 60 per cent. Through the peak of tech enthusiasm, they were undoubtedly bid up to sky-high earnings multiples. Now their valuations are more grounded.
Still, old-world reliable industrials have been tracking ever higher, pushing the Australian market to a record this week. Wall Street’s narrow Dow Jones and its industrial S&P 500 are both near record highs, despite the tech hit. That is clearly a result of rotation – money coming out of one stock (tech) and into another – industrials.
Howard Marks, the founder of Oaktree Capital Management, has a more simple view. He has often addressed the theme of stock volatility over the decades he has been writing his memos, including through the rise of high-frequency trading.
Following a major broad market sell-off in early 2024, he pointed out that in the real world, things fluctuate between “pretty good” and “not so hot”. But when it comes to investing, perception swings from “flawless” to “hopeless”.
“That says about 80 per cent of what you need to know on the subject,” Marks wrote in a recent memo to clients.
Marks says when prices collapse, it is not because conditions have suddenly become bad. Rather, they become “perceived” as bad. The same can equally be said about rallies.
There are three factors contributing to the process: a heightened awareness of things on one side of the emotional ledger; a tendency to overlook things on the other side; and finally, a tendency to interpret things in a way that fits the prevailing narrative.
In general, Marks believes, investors tend to err on the side of optimism, ignoring the negatives. When the pendulum swings, there is a dramatic effect.
“If security prices were really the result of the rational, dispassionate evaluation of data, presumably one piece of negative information would move the market down a little, and the next such piece would move it down a bit more, and so forth,” Marks says. “But instead, we see that an optimistic market is capable of ignoring individual pieces of bad news until a critical mass of bad news builds up, at which time a tipping point is reached, the optimists surrender, and a rout begins.”
He likens this to air going out of the balloon much faster than it went in. Or, to mangle a Hemingway quote: “Gradually, then suddenly.”
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One seasoned chief executive says he can’t recall seeing anything like it. Another warned it is a sign of things to come. Forget earnings beats or misses, or even record market highs – extreme volatility has been the defining theme of February’s reporting season.