The Market’s Latest Problem: Hesitation To Buy The Dip (#GotBitcoin?)
The diminishing lure of discounted stocks is the latest sign that investors are approaching selloffs with more caution.
An investor trend that has helped buoy stocks over most of the past decade is showing signs of breaking down.
For the first time since the dot-com era, investors are cautious about buying shares after selloffs, raising signals that the longest bull market in U.S. history is in its late stages.
Going back to the 1980s, the S&P 500 has typically rebounded after posting a weekly loss, such as the punishing setback it suffered last week. This year, that “buy-the-dip” trend has broken apart. The broad index has fallen an average of 0.04 percentage point on the day following weekly declines, marking the first time since 2002 that stocks have consistently slipped after one-week pullbacks, according to Morgan Stanley .
What is troubling is that the only years in which stocks haven’t reliably rebounded following dips have been either at the start of or in the middle of a bear market, Morgan Stanley says. In some years, including 1982, 1990 and 2002, investors were hit by not just a bear market but also a recession.
Where’s the Rebound?
The S&P 500 has tended to fall this year after pullbacks, breaking away from the pattern of thepast several years, where market dips were more consistently followed by rebounds.
The diminishing lure of discounted stocks is the latest sign that investors are approaching selloffs with more caution than in years past. After major indexes fell more than 4% last week, the S&P 500 was down 1.5% for 2018, while the Dow Jones Industrial Average had fallen 1.3%. The two indexes initially rose Friday after data showed the U.S. economy on solid footing, only to tumble hours later.
“As you get later in the cycle, it becomes more challenging, because the dip may not be a chance to buy, but the start of the end,” said Joseph Amato, chief investment officer of equities at Neuberger Berman.
To be sure, many investors believe that the bull market will continue to grind higher throughout 2019. Although the U.S. economy has shown signs of cooling—particularly within the housing and auto sectors—it has remained firmly in expansion territory. And new signs emerged Thursday that the Federal Reserve is open to pausing its rate-increase campaign earlier than investors had initially expected, something that helped U.S. stocks finish well off their lows that day. Fears that tightening monetary policy would crimp corporate profits and diminish the allure of stocks have kept major indexes under pressure for much of the past couple of months.
A fundamental change in the type of funds owned by investors also could be playing a role in the lack of buyers. For decades, stock pickers and other managers who evaluate companies on an individual basis dominated the daily action on Wall Street. But more recently, index funds and other passive investment vehicles have dominated flows. Last year alone, passively managed mutual and exchange-traded funds took in more than $700 billion, according to Morningstar Inc.
Still, unease over how much longer the expansion can continue has pushed more investors to sit on the sidelines or trim their positions instead of using pullbacks as buying opportunities. Investors’ willingness to chase returns is likely to be even more diminished with just a little over three weeks of trading left to go in 2018—a narrow window for fund managers to try to catch up to their benchmarks.
Perhaps the starkest example of the buy-the-dip approach fading has been in the technology sector. Last year, investors were mostly forgiving of pullbacks, betting that drops caused by everything from fears of regulatory scrutiny to worries about valuations were temporary, not signs of issues that should hurt prices over the long haul.
Investors appear to have taken a more pessimistic view this year, shedding holdings of companies including Facebook Inc. and Nvidia Corp. , whose shares are both down more than 20% in 2018. Just 18% of fund managers say they have overweight positions in global technology stocks, according to a Bank of America Merrill Lynch survey released in November, down from 25% the month before and the lowest share since 2009.
In another sign that the wariness is likely to persist, some banks have begun to issue more conservative investment recommendations for their clients. Heading into 2019, BAML is suggesting that individuals willing to take on a moderate level of risk trim the weighing of stocks in their portfolio to 50% from 54% and bump up their cash holdings to 10% from 6%.
Investors’ apprehension also appears to have hit the bond market, where Treasury yields—which rise as bond prices fall—have managed to remain well off their lows for the year. That is notable because stocks and bond yields typically rise in tandem when investors are feeling confident about the U.S. economy.
Heading into last Friday’s monthly employment report, BMO Capital Markets found 44% of traders said they would buy the dip, compared with a historical average of 49%. Traders also appeared to be more willing to sell the dip: 15% indicated they would do so, above the average of 10%.
Despite the pessimism permeating the markets, some investors are continuing to scout out buying opportunities, arguing that the volatility spilling through stocks and bonds is symptomatic of nervousness, but not necessarily of an imminent economic downturn.
“Markets are suggesting we have a good chance of a recession next year. But the level of uncertainty is much higher than it should be,” said Thomas Digenan, head of the U.S. intrinsic-value equity team at UBS Asset Management. He added that the firm estimates only roughly a 15% chance of the U.S. tipping into recession in 2019.
One area that Mr. Digenan thinks has been oversold is semiconductor shares, which have tumbled in 2018 after staging a furious rally last year. Mr. Digenan said he would still consider buying shares in the sector, reasoning that fears of the trade fight between the U.S. and China damping demand for chips may have been overblown.
Mr. Digenan said he also has taken a look at companies in the beaten-down retail sector, especially firms such as Michaels Cos. with niche offerings that might be able to avoid competing directly with the likes of Amazon.com Inc.
Still, the pullbacks throughout the market show that many are choosing not to buy. And even those who believe the bull market still has longer to run say that the opportunities to choose winners have become slimmer.
“You have to be a lot pickier at this point in the cycle,” Mr. Digenan said.
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