Wall Street is sharply split on buying the dip as the U.S. stock market is on course for its worst January since 2009.
Buying the dip or adding stocks during a downturn has proven a lucrative strategy since the start of the pandemic. Markets 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 prepares to quell high inflation, investors strongly disagree on how markets will rebound this time around.
“The downside buy reflex should be resisted in the environment we will likely continue to face in 2022,” said Rob Sharps, the new managing director of T Rowe Price, the fund manager that oversees 1.7 billion in assets.
Bill Gross, founder and former chief investment officer of $2.2 billion fund manager Pimco, told the Financial Times: “The buy-down mentality has been shattered in the market.”
Markets have had a rocky start to 2022 as highly rated tech stocks and loss-making but buzzing names are brought down to earth. The tech-heavy Nasdaq Composite Index is down nearly 13% year-to-date, while the S&P 500 index of blue-chip U.S. stocks has fallen 7.6%, even after rallying on Friday evening.
Stocks moved violently as investors grapple with the trajectory of US interest rates. The Federal Reserve signaled this week that it would start raising rates in March, and Chairman Jay Powell left open the prospect of an aggressive string of rate hikes over the course of the year.
Wall Street analysts took notice: HSBC warned investors there was little indication Powell would step in to support a falling market, while Jefferies said the more the Fed tightens, the more optimism in the markets will be questioned.
“Any environment where there is a reversal of accommodative monetary policy makes it harder to expect returns to be robust, and that’s necessarily the right thing to do to buy every pullback,” Sharps said in an interview with the FT.
Yet others jump on the pullbacks. Billionaire Bill Ackman, head of hedge fund Pershing Square, said this week his group bought more than 3.1 million shares of Netflix after the video streaming company’s price plummeted.
“Many of our best investments have emerged when other investors with short-term time horizons reject large companies at prices that look extraordinarily attractive when one has a long-term horizon,” Ackman said in a published letter. Wednesday.
Jonathan Gray, chairman of Blackstone, said earlier this week that “the market is trading and the average Nasdaq stock is down more than 40% [from last year’s all-time high] could create opportunities” for the private equity and alternatives manager with $881 billion in assets.
And Ark Invest’s Cathie Wood, whose flagship portfolio of once high-flying tech stocks is down 27% since the start of 2022, argued this week that “innovation is on sale” after falling prices. asset prices.
Analysts note that this month’s selloff was not just driven by interest rate concerns, but also by fundamentals, as companies trading at high valuation multiples start to appear. more precarious.
Gross said that as Fed policy tightens, investors, especially new ones who have only seen a bull market, will be hesitant to buy falling stocks “in what we’re starting to see as a bear market”.
Additional reporting by Nicholas Megaw