Market Turmoil Revives Age-Old Question: Should You Buy the Dip?
The stock market’s slide early this past week left many investors reeling. Jeff Garrett, a 41-year-old lawyer in Texas, started buying.
Garrett used the Monday Aug. 5 global selloff to load up on index funds. The strategy has worked for him before. He bought into the Covid market panic, even as acquaintances pulled their money, and stocks soon rebounded to new highs.
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“It takes a strong stomach,” he said. “On the whole, markets have a tendency to go up.”
The recent market meltdown and subsequent ricochets are testing an investing tactic that has carried U.S. stocks higher time and again in the past 15 years: buying the dip. In the years after the 2008-09 financial crisis, investors were rewarded for trying it. The longest bull market in history turned it into a rallying cry from the boardroom to the barbershop. The internet coined a shorthand term: BTD.
Generally, financial advisers say people should continue to invest through the market’s swings, particularly those rooted in arcane trades originating halfway around the world. Since 1980, after a 5% drop from a recent high, the S&P 500 has generated a median return of 6% over the following three months, according to Goldman Sachs.
But just because a Wall Street strategy has worked for a long time doesn’t mean it will forever. After the tech bubble burst, the S&P 500 took seven years to regain the heights of 2000. The Nasdaq Composite needed 15 years. And the pandemic era has brought surprising changes to inflation and the economy—the kind that can shift market dynamics for years to come.
Joe Meyer, a 39-year-old event coordinator on Long Island in New York, said he has no problem buying at a discount. He tends to pick up shares of popular index funds and well-known brands when prices fall. On Aug. 5, he purchased Nvidia, Walt Disney and CVS Health shares.
“I don’t panic at all. It’s a long-term thing,” said Meyer, who is investing for retirement. “I’m just trying to get the most out of my money.”
For much of 2024, stocks seemed as though they would march ever higher. Investors hungry for a piece of an AI-powered future rushed into the market’s tech giants. They drove the S&P 500 to 38 record closes and briefly made the chip maker Nvidia, a darling of the artificial-intelligence trade, the world’s most valuable listed company.
The market was unusually serene. Until a tech selloff last month, the S&P 500 had gone 356 trading days without a 2% decline, the longest such streak since one ending in February 2007, according to Dow Jones Market Data.
Then the recent tumult arrived. The monthly jobs report revealed a slowdown in hiring, stoking fears of recession. A hawkish turn by Japan’s central bank upset Wall Street’s popular carry trade, through which investors borrow yen at ultralow interest rates to buy riskier assets like U.S. stocks. The S&P 500 tumbled 3% and the Dow Jones Industrial Average lost more than 1,000 points in the worst day for both in nearly two years.
In the following days, stocks seesawed. The S&P 500 ultimately ended the week down less than 0.1%. Investors are bracing for a slate of data—including inflation, retail sales and consumer sentiment—that could again jolt the market in the week ahead.
The recent turmoil sent individual investors rushing to their trading accounts. So many tried to check their portfolios or to place trades on Aug. 5 that Charles Schwab, Vanguard Group and Fidelity Investments experienced outages. Some customers had difficulties logging into their accounts that morning and were locked out for a couple of hours.
According to a JPMorgan analysis, individual investors in aggregate were net buyers of exchange-traded funds on Monday Aug. 5, but aggressive sellers of single stocks. Individuals were buyers of equities on Tuesday and Wednesday, JPMorgan estimated.
Institutional investors, meanwhile, overall bought the dip on Aug. 5, then were sellers of equities Tuesday and Wednesday, according to the firm’s analysis.
NFJ Investment Group, a value equity manager, established a new position in an industrial company whose price had fallen in the selloff, said Chief Investment Officer John Mowrey. “When we see dramatic moves in a couple days, those can be interesting opportunities,” he said.
Panic selling can backfire, since the market’s best days tend to follow its worst. Missing out on the 10 best days for the S&P 500 each decade would result in a return of about 76% since 1930, compared with a nearly 25,000% gain staying invested, according to Bank of America.
“All investors now know that you have to stay invested in the market, and it does come back,” said Gina Bolvin, president of Bolvin Wealth Management Group.
Buying the dip hasn’t always reaped immediate benefits. In 2022, down days in the market were often followed by more declines, walloping investors again. The S&P 500 dropped 19%, its worst year since 2008.
Wall Street bears have a list of reasons to stay on alert, from signs the economy is slowing to a presidential election to intensifying conflict in the Middle East.
And stocks look relatively pricey. Companies in the S&P 500 are trading at about 20 times their projected earnings over the next 12 months, above a 10-year average of roughly 18, according to FactSet.
Meanwhile, investors can still earn real money on cash. Trillions of dollars are parked in money-market funds, which can offer yields of about 5%.
Roger Clark, a small-business owner in Milwaukee, isn’t planning to touch his portfolio at the moment. Clark, 64 years old, said he has to be a bit more cautious about his investing strategy. He is keeping more money in money-market and bond funds than in the past.
Clark is concerned that U.S. consumers are stretched thin, which could hurt the economy and corporate earnings. He is also worried about political uncertainty with the presidential election in November.
“I’m not convinced that there’s enough stability to merit putting additional money in the stock market right now,” said Clark.
Write to Hannah Miao at hannah.miao@wsj.com and Karen Langley at karen.langley@wsj.com