If your portfolio has taken a big hit recently, you're certainly not alone.
On 27 April, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) closed at its highest level in seven years at 5,982.7 points, and investors were sure that it had the capacity to breach the 6,000 mark for the first time since 2008.
A lot has changed since then, and it's likely that more investors are now wondering how soon the bourse will fall below the 5,000 point mark instead.
In just two weeks, the ASX 200 has fallen almost 6% in what has been one of the sharpest falls in recent memory. Leading into Monday, the benchmark index was sitting at just 5,634 points with signs that it could fall even further over the coming weeks.
Sell in May and Go Away?
Given the time of year, some investors are likely to point to the old adage "Sell in May and Go Away" as the reason behind the recent pullback, but the real reason is much more than that.
In recent years, investors have become increasingly reliant on the policies of central banks around the world to provide the driving factors behind equity markets. While that has certainly been the case in the United States – with the NASDAQ, Dow Jones and S&P 500 indices all sitting at record highs thanks to stimulus provided by the Federal Reserve – the same holds true in Australia where falling interest rates have forced investors into the stock market.
While investors got what they were hoping for from the Reserve Bank last week when it cut interest rates to just 2%, they responded negatively to indications that interest rates were unlikely to fall any lower. As such, investors have largely turned their backs on high-yield stocks such as Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES), both of which had been looking a little pricey.
What's really going on?
It could be argued that the markets have overreacted to the Reserve Bank's indications. After all, interest rates are sitting at an all-time low and are extremely likely to remain down for the foreseeable future, so dividends are still as attractive as ever before (for the record, I believe investing in high-yield dividend stocks is still a great way for investors to grow their wealth over the long-term).
However, few could argue against the rationality of investors who have sold their bank shares in the last week. Each of Australia's largest banks provided investors with their latest earnings reports and the results were nothing short of alarming.
Westpac Banking Corp's (ASX: WBC) profit was in line with that reported in the prior corresponding period while the bank was also forced to raise $2 billion worth of capital. National Australia Bank Ltd. (ASX: NAB) will also raise $5.5 billion of capital, while Commonwealth Bank of Australia's (ASX: CBA) profit actually fell compared to the prior corresponding period. Given the lofty premiums at which each of the Big Four banks were trading on, investors were always going to punish any signs of weakness moving forward.
While Australia and New Zealand Banking Group's (ASX: ANZ) and Macquarie Group Ltd's (ASX: MQG) reports showed more promise, the fact remains that the headwinds facing the banking sector could seriously hinder their profit growth in the years ahead, whilst also impacting their ability to grow dividends.
When combined, the Big Four banks account for almost 32% of the overall ASX 200. With their shares all crumbling in price, it's no wonder why the market is taking such a heavy beating.
What would YOU do if the market crashed tomorrow?
Here at The Motley Fool, we've long argued that each of the Big Four have become wildly overpriced and, while we might have looked a little silly as they continued to climb in price, it seems that the market is now catching on as well.
While some investors will no doubt see this as a great opportunity to buy the banks on the cheap, there is a good chance they could continue to weaken over the coming weeks, or even months, which could certainly drag the overall sharemarket as a whole down further as well.
