Investors’ willingness to buy the dip has cushioned every downturn for nine years, and was playing out again Monday as the Dow climbed 1.7 percent. But bears warn that investors’ complacency masks a shifting economic picture with the potential to end the bull market.
Somehow, amid a stock sell-off that erased $2 trillion from the value of U.S. equities in 10 days and caused volatility to spiral, clients at investment firms have kept their heads. Not everyone is convinced that’s great news.
Ever unflappable, investors’ willingness to buy the dip has cushioned every downturn for nine years, and was playing out again Monday as the Dow Jones industrial average rose 410 points, or 1.7 percent. Bears have another name for it — complacency — and say it masks a shifting economic picture with the potential to end the bull market.
“The market becomes less overvalued, and everybody jumps in — that’s complacency,” said Brian Frank, portfolio manager at Key Biscayne, Florida-based Frank Capital Partners. “At some point, fundamentals will be the only thing that matters, and it will burn everybody who’s ignoring them.”
While market tranquillity was shattered last week and the pace of client inquiries rose, few strategists or fund managers say anyone is panicking. Instead, they reported getting phone calls from investors who, while alarmed by the speed of the correction, wondered if it was a chance to dive back in.
On Wall Street and beyond, they’ve been nearly unanimous in describing steadfast clients. “I didn’t have to necessarily talk anyone off the ledge, like ‘Oh my god, should I sell everything?’ ” Mona Mahajan, U.S. investment strategist for Allianz Global Investors, said Friday.
Jack Ablin, chief investment officer at Cresset Wealth Advisors, said: “I bought into the sell-off on Friday morning and I encouraged others to do so as well. The market was 15 percent overvalued; we had a 10 percent correction. What, is the market 5 percent overvalued? It’s technical noise in my books.”
More than anything, it’s surging bond rates — and the inflationary forces they signify — that leads some to worry this episode is different. With no acquiescent Fed to bail them out, using stretches like last week to buy shares becomes a far riskier proposition. Gone is the force that kept everything predictable.
“One change is the volatility question,” said Katrina Lamb, head of investment strategy and research at Bethesda, Maryland-based MV Capital Management. “You have higher levels of volatility, which means the risk of this happening more often, which means at some point that the people who are trying to play the buy the dip might get caught out.”