Buying dips has been a good “strategy” in the post-financial crisis era.
Indeed, it’s been nearly infallible. This is a favorite topic of mine, and I typically recycle language from previous articles when describing how it came to be that “BTD” went from standing joke to a real thing.
So, to recapitulate, how was “BTD” legitimized? Below is a brief recap, excerpted from multiple previous articles published here:
The vaunted “Goldilocks” narrative of synchronous global growth and still-subdued inflation underpinned the low vol regime by allowing traders to point to upbeat economic indicators while citing well-anchored inflation as a reason to expect central banks to remain accommodative for the foreseeable future. And when it came to central banks, the two-way communication loop between policymakers and markets became a self-fulfilling prophecy. Markets became so conditioned to policymaker intervention and dovish forward guidance that no one saw any utility in waiting around for it anymore. After all, if you know it’s coming, why wait on it? Why not buy the dip now? Once that mentality takes hold, it obviates the need for further dovishness. Markets react to the expectation of dovishness and in doing so, ensure that the policymaker “put” runs on autopilot. As BofA once put it, “competition to buy the dip becomes so strong, CBs no longer need to react.”
That’s why the onset of inflation and its refusal to abate is such a big deal for markets. It means reliably dovish forward guidance is out, yes, but more importantly, it risks a scenario where all forward guidance is withdrawn. That’s due to the ambiguity associated with the macro and the necessity of reclaiming legitimacy vis-à-vis price mandates, possibly via swift action not accompanied by the usual six-month adjustment period afforded to risk assets. That act of withdrawing transparency is highly destabilizing for all manner of carry trades and sundry manifestations of short vol.
So, with that in mind, it’s worth noting that despite the acute lack of clarity on the long-term and policymakers’ inability to promise much beyond trying to strike a good balance between avoiding “surprises” and using their “tools” to fight inflation, dip-buying isn’t dead. Not by a long shot.
“During a volatile week for the S&P 500 amid Russia-Ukraine conflict, clients returned to buying US equities after selling the prior week,” BofA’s Jill Carey Hall said Tuesday, noting that all three client groups (institutional, hedge funds and private clients) were buyers.
In fact, Carey Hall noted that not only have private clients been buyers every week this year, “buying of this dip by retail was more aggressive than during other 10% pullbacks post-crisis (figure below).
What’s behind that? Do investors not know about the war and the nuclear threats?
Well, of course they do. But, as ever, the Pavlovian response function is a powerful thing. And so is FOMO.
In the Tuesday note highlighting the latest aggregated client trading flows into US stocks executed by the firm’s cash equities business, BofA cited “fear of missing out on what has generally been a continually successful strategy post-crisis.”
I’m only BTD on PSQ. (wry humor emoji)
An interesting dynamic underfoot is the global post Trump, post pandemic mindset of burned out humans. Besides stocks, housing trends and COVID, a lot of people tuned out traditional news. I have no proof to back that up, basically because I’m tired of research and fickle data. Nonetheless, the timing of the Ukraine invasion is acting like a global solidarity event that is drawing people into news, in a new way. The prior period of trumpian nonstop 3rd grade tweets fed into heightened polarization in almost every issue, dividing virtually every one on almost everything, but, here we are with seemingly United rejection of Putin madness.
The pandemic has both amplified and stunted social connectivity, providing new directions forward, yet instead of people remaining in shock, perhaps a new global mindset mutated into a more focused perspective, where it’s clearly obvious that monsters like Putin are contained. That sense of good versus evil may spill into markets as people act proactively in buying dips.
Hopefully, Russian people will realize they need to join this new mindset and rid themselves of insane leadership. They have to be ashamed of their GDP decay and point to Putin as the leader of their downfall.
Sounds like some folks are about to catch a falling knife.
The threat of nuclear war would not deter me from buying equities. If I bet wrong–what does it matter?
Joking aside, you’ll want cash to buy a bunker and supplies before your area is impacted. Destruction of vast swaths of land wouldn’t be immediate, and the first bomb wouldn’t detonate in the U.S., so people will still accept your cash before disbelief turns into panic.