As stock markets dipped and the Dow Jones took a tumble at the end of February. Many analysts saw this as the beginning of a long-overdue market correction.
Some have floated talk of a stock market bubble for a while. But, the market rebounded and finished out the year strongly despite the last year’s challenging conditions.
However, the dip on the 24th of February — saw the index shed 1000 points. And, led to some traders talking of an opportunity to cash in on the slide.
What Are Stock Market Dips?
“Buy the Dips” is a phrase used in investment circles. It describes taking advantage of a decline in the price of an asset.
It’s based on the Elliott Wave Theory that suggests that even a well-performing stock will have price waves that dip up and down.
Meaning that investors who get in at the right point can take advantage of the peaks and troughs.
What To Make of The Pullback?
The big thing for investors is to figure out precisely what this pullback means. Analysts suggested that the stock market is overvalued.
So, these corrections weren’t a complete surprise. However, while buying in the stock market dip can be profitable. Buying into a falling market would be disastrous for investors.
Time to Buy from the Stock Market
Mehvish Ayub at State Street Global Advisors suggests that while the stock market correction was overdue. Strong fundamentals and promising company earnings mean there is nothing to get too worried about. If anything, this dip should be seen as an opportunity to buy at a discounted price.
Marko Kolanovic, J.P. Morgan’s Global Head of Macro Quantitative and Derivatives Strategy team, echoes this sentiment. He suggests that as the economy recovers through government assistance and the vaccine rollout. Any pullback in the S&P 500 is potentially a buying opportunity.
Kolanovic remains confident that there is no stock market bubble. He cites the yardstick that defines an asset bubble as a tripling of value in the space of three years.
The S&P 500 is up 30% over that time period. So, for Kolanovic, this doesn’t meet the criteria. He feels investors should take advantage of the short-term price decline.
Time To Be Cautious
However, not everyone shares Ayub and Kolanovic’s exuberance about the stock market.
Micheal Hartnett of Bank of America made his case in a research report sent to clients. It said that he expects a lower than 1% rise for the S&P 500 during 2021.
Harnett expressed deep concern about the credit market. He suggests that liquidity fears in China could lead to a global correction. Additionally, Harnett cited that gross proceeds from Special Purpose Acquisition Companies had almost quadrupled.
The three R’s – Rates, Regulation and Redistribution
In what he felt was a sure sign of the excesses within the broader market. He added that the 3 R’s — rates, regulation, and redistribution — were all set to bring an end to the bull market.
Mike Wilson, the Chief U.S. equity strategist at Morgan Stanley, also sounded a note of caution, about the recent surge in share prices.
Although he stopped short of suggesting the market was in a bubble. He made clear that until investors cut risk exposure, the corrections won’t be over.
Again, Wilson cited strong fundamentals as a reason to be optimistic overall. He suggested that a lack of “obvious fundamental catalysts”, meant it was hard to time the corrections in new bull markets.
Alpesh Patel’s Conclusion About the Stock Market
While it might be tempting to buy during the dip, it does require having a very optimistic outlook of the broader market.
Catching stocks on the way down and holding on to them longer-term is a perfect plan, if you sense they’ll return to previous levels. It’s easy to miss the train and be left holding a costly ticket.
A wiser move is to invest in resilient stocks on the stock market. These are uncertain economic times. While the vaccine rollout programs are speeding ahead.
The economy is recovering from the pandemic. Global governments have invested an unprecedented amount of money in recovery and stimulus packages.
When government assistance is easing slowly. The economy will feel the true scale of the pandemic’s damage, and loan delinquency could set-off a broader decline. In worrying times like these, portfolios with resilient stocks make more sense.
While resilient stocks might not produce the eye-catching marketing-beating returns associated with buying the dip. A diverse, lower-risk profile can be relied upon to make steady returns.
Economic forecasts for the next year are uncertain, and with further corrections possible. Exposing yourself to too much risk could go wrong in several ways.
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Alpesh Patel OBE