International equity markets seem to effortlessly surge to brand new record highs with each passing day. As we note fairly frequently, declines have grown shallower over the past two years and the S&P 500 has now gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index, according to LPL Financial. Meanwhile, the S&P hasn’t had a decline of 10% or more from a recent peak since February 2016.
So, in light of surging valuations, which are at, or near, all time highs depending on your metric of choice, international tensions which could seemingly spark a brand new global conflict at any point and non-stop allegations of treason on both sides of the aisle in Washington D.C., the Wall Street Journal recently set out to discover why markets seem so immune to bad news.
Alas, as it turns out, the answer is quite simple with Allianz chief economic advisor Mohamed El-Erian confirming that it all comes down to a simple strategy: Buy The Fucking Dip (BTFD).
The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets, investors say. On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.
The gains reflect both economic optimism and recognition of the strong returns reaped by those who have stayed invested in riskier assets during the rebound from the epic market decline in 2008-09.
“The investor base has been conditioned to buy the dip,” said Mohamed El-Erian, chief economic adviser at Allianz SE. “And the reason why they have been conditioned is because it has been an extremely profitable trade.”
Meanwhile, being the savvy investors that they are, the WSJ notes that Americans have become so immune to equity risk that dips are getting filled faster and faster…
In the stock market, investors are buying the dip more quickly than they used to. The S&P 500 recouped the bulk of its 5.3% two-day post-Brexit decline, in June 2016, in only three trading days. It took just three days for the S&P 500 to recover from a 1.8% drop in May—its largest one-day decline of the year—following reports that President Donald Trump asked then-FBI Director James Comey to drop an investigation into former National Security Adviser Michael Flynn.
That is a faster recovery than when the S&P 500 fell 11% over a six-day stretch in August 2015 and then took until November of that year to get back to its pre-selloff level.
Some observers worry that the buy-the-dip mentality, like the persistent decline over the past year in daily stock-price swings known as volatility, could point to an underlying complacency that will end with a big selloff.
Take the case of General Electric, for example, whose stock crashed over 6% in early trading last week after missing earnings and slashing guidance but quickly recovered and finished the day in the green.
In the case of General Electric Co., shares tumbled 6.3% in early trading on Oct. 20 after the conglomerate missed analyst earnings expectations and slashed its forecasts. But buyers quickly stepped in on GE’s heaviest trading volume session in nearly two years, and the stock ended 1.1% higher.
An analysis of the type of the size of trades made that day indicate that most dip buyers were smaller investors or high-frequency professionals that trade in quick bursts, rather than large institutions that tend to transact in larger chunks.
Of course, it’s not just U.S. markets that have been taken over by the BTFD crowd as all risk has suddenly disappeared from emerging markets as well.
The Brazilian real plunged against the dollar, while Brazilian shares tumbled 8.8% on May 18, after the country’s Supreme Court approved an investigation of President Michel Temer amid bribery accusations. Three months later, the Bovespa Index was back at records and the volatility failed to weigh on other emerging-market stocks.
The buy-the-dip trade is surfacing in niche markets, too. Rob Lutts, president of Cabot Wealth Management in Salem, Mass., recently bought the Global X Lithium & Battery Tech exchange-traded fund.
“This is a type of market where bad news is met with unbelievable resilience,” Mr. Lutts said. “I think it tells you there’s still a lot of money on the sidelines.”
Of course, as Marilyn Cohen of Envision Capital Management points out, with this level of complacency having taken over international markets, when the tide turns the resulting decline will be precipitous and “psychologically painful.”
“People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.”
Finally, just because it seems appropriate, here is a flashback to the original introduction to the BTFD trade…