Wall Street is starkly divided over buying the dip as the US stock market is on track for its worst January since 2009.
Buying the dip, or adding shares during downturns, has proven a lucrative strategy since the start of the pandemic. Markets have rebounded higher and faster as monetary and fiscal policy kept borrowing rates near zero and flooded the economy with money.
But as the Federal Reserve moves to clamp down on high inflation, investors sharply disagree over how well markets will bounce back this time.
“The buy-the-dip reflex should be resisted in the environment we are likely to continue to face in 2022,” said Rob Sharps, the new chief executive of T Rowe Price, the fund manager which oversees $1.7tn in assets.
Bill Gross, the founder and former chief investment officer of $2.2tn fund manager Pimco, told the Financial Times: “The buy the dip mentality has been obliterated in the market.”
Markets have had a rough start to 2022 as highly-valued tech stocks and lossmaking but buzzy names are pulled back to earth. The tech-heavy Nasdaq Composite index is down nearly 13 per cent since the start of the year, while the S&P 500 index of US blue-chip stocks has dropped 7.6 per cent, even after a rally late on Friday.
Shares have moved violently as investors grapple with the path of US interest rates. The Federal Reserve this week signalled it would begin to raise rates in March, and Jay Powell, chair, left open the prospect of an aggressive sequence of rate rises during the year.
Wall Street analysts took notice: HSBC warned investors that there was little indication that Powell would step in to prop up a falling market, while Jefferies said that the more the Fed tightens, the more optimism in the markets will come into doubt.
“Any environment where there is a reversal of accommodating monetary policy makes it more difficult to expect that returns will be robust, and that it is necessarily the right thing to do to buy each pullback,” Sharps said in an interview with the FT.
Yet others are pouncing on pullbacks. The billionaire Bill Ackman, the head of the hedge fund Pershing Square, this week said his group bought more than 3.1m shares of Netflix after the video streaming company’s price had slumped.
“Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon,” Ackman said in a letter released on Wednesday.
Jonathan Gray, president of Blackstone, said earlier this week that “the market trading off and the average Nasdaq stock being down over 40 per cent [from last year’s all-time high] could create opportunities” for the private equity and alternatives manager with $881bn in assets.
And Cathie Wood of Ark Invest, whose once high-flying flagship portfolio of tech stocks is down 27 per cent since the start of 2022, this week argued that “innovation is on sale” after asset prices dropped.
Analysts note that this month’s sell-offs have been not simply driven by concerns over interest rates but fundamentals, as companies trading at high valuation multiples begin to look more precarious.
Gross said that as Fed policy tightens, investors, especially new ones who have only experienced a bull market, will shy away from buying shares on the way down “in what we’re beginning to see as a bear market”.
Additional reporting by Nicholas Megaw