David has been wiped out before. A keen swimmer as a young man in the 1980s, he would slump on the couch after practice on Saturday afternoons and study the horse racing guide. Watching the bookie’s top pick lose one too many times led him to look elsewhere for ways to make money: commodity markets. Borrowing $6,000 from the bank, he put it in a professionally managed account trading commodity futures. Eleven months later the balance hit zero, and David was one lesson the wiser.

“I’d read a couple of books on commodity futures so I thought I knew all about them,” says David over the phone with Morningstar.

“It took eleven months to wipe out the account. I sent them a letter very nicely saying thank you for your expert advice, I can lose my own money as quickly as you’ve lost it. I decided then and there I wouldn’t let other people invest my money.”

Now in his early 60s, a Morningstar reader and recently retired from a career in the mining sector, David maintains a healthy scepticism towards experts and forecasters, especially those crying wolf at every downturn. But today, as the S&P 500 flirts with a bear market for the first time since February 2020, David thinks the pessimists could finally be right.

“Berserk” house prices, the lowest interest rates in generations and the breakneck rise and fall in cryptocurrency speculation all point to markets that don’t make much sense, he says.

“For 40 years I’ve heard that ‘this time is different,’" he says. "I’ve never really believed it before, but this time I actually think it is. There is so much going on in the world right now that is very unpredictable.”

David is far from a permanent pessimist. When markets collapsed during the early stages of the pandemic, he waded into a “wonderful buying opportunity”. But today, the self-described value investor is trimming the pricier parts of his portfolio and building cash. When markets rally, as the S&P/ASX 200 did last week, he’s selling the “temporary peaks”. David believes the bottom is still some way off.

David pictured on holiday.

Risk appetite is retreating globally as institutional and retail investors alike grow pessimistic about how rising prices and a decelerating economy will hit corporate profits and equity markets. Cash holdings among global fund managers in May 2022 are at their highest level since the 9/11 terrorist attacks, according to a Bank of America survey. Margin debt, options trading and sentiment are all trending lower as investors hunker down to wait out the volatility.

Peter Warnes, Morningstar head of equity research is another reluctant member of the bear camp. While confident the market storm will eventually rage itself out, he believes it is not yet time to buy the dip.

“I don’t like being bearish, I don’t like it at all. I’m just being a realist. No use painting a picture for optimism if every colour in the palette is dark,” he says.

The Dow Jones Industrial Average fell for the eighth week in a row on Friday, the longest downwards streak since 1932, near the height of the Great Depression. The US blue-chip index is down 13% this year while the technology-heavy Nasdaq Composite has fallen 27%. Booming commodity prices are insulating Australian shares from some of the carnage, with the S&P/ASX 200 down 6% this year.

Speaking from his home in Maroochydore on Queensland’s Sunshine Coast, Morningstar reader Bryan sees long-held fears coming to fruition.

The 86-year-old has spent the last decade worrying about “black swans”, the impossible-to-predict catastrophes first popularised by Nassim Taleb on the eve of the Global Financial Crisis. A self-described “permabear”, Bryan has been selling down his equity positions and is close to 90% in cash.

“There’s too much risk to be sitting around heavily invested in shares,” he says. “I can’t see too many reasons why markets could bound ahead in the future and I can see a lot of real concerns.”

A financial planner for many years, his investing journey started around the dinner table talking with his father, who was a company director. Bryan knows the conventional wisdom by heart: maintain a balanced portfolio, time in the market beats timing the market. All the same, he loves the flexibility cash provides.

Bryan is not alone. Gemma Dale, a director at Nabtrade says investors on the trading platform are holding cash at record levels. The winners of the post-covid boom, such as buy-now-pay-later stocks, are being sold down and there is little buying interest outside commodities, she adds.

“Buy the dip is not there anymore. People seem to have lost that appetite,” she says.

 

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