Surge in Global Stocks Fueled By Investors 'Buying the Dip' -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 30, 2017).

Markets around the globe are surging to records, reflecting growing optimism about the world economy and fueling an increasing eagerness by investors to step in and buy assets whenever prices dip.

In the U.S. stock market, declines have grown shallower over the past two years and are snapping back sooner. The S&P 500 has gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index, according to LPL Financial. The index hasn't had a decline of 10% or more from a recent peak since February 2016.

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."

With interest rates still low and valuations on many stocks, bonds and other assets looking stretched, many investors seem willing to buy anything that gets knocked down and suddenly looks cheaper, betting the most probable outcome will be a rebound. On Wall Street, the phrase "Fed put" -- a bet that the central bank would deploy monetary policy to help reverse a stock selloff -- has become common parlance.

"If you want to make a return, you've got to buy risky assets," said Jeffrey Knight, co-head of global asset allocation at Columbia Threadneedle Investments. He expanded bets on positions in commodities this summer after worries about an oversupply of oil led to a selloff.

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.

Even when prices drop, declines that in prior years might have deepened or spread more broadly are now quickly contained, investors say. Riskier assets such as the Turkish lira and Brazilian exchange-traded funds have bounced back almost immediately following recent declines.

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.

"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," said Marilyn Cohen, the Los Angeles-based president and owner of Envision Capital Management.

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.

In the days that followed, GE shares resumed their fall after several analyst downgrades and concerns that the company would have to cut its dividend. Shares closed Friday at $20.79, below the $23.58 they settled at the day before GE reported earnings.

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 Turkish lira fell 2.3% against the U.S. dollar on Oct. 9, a day after the U.S. and Turkey stopped issuing nonimmigrant visas to each others' citizens -- and then bounced back two days later, erasing more than half of the declines.

Isolated drops in major developing markets were less typical in prior years, said Seema Shah, global investment strategist at Principal Global Investors.

"Hot money is not what it once was," she said. "Investors are starting to think about whether these political crises are really going to affect the underlying economies."

Some investors say this danger could intensify if an upsurge in inflation prompts the Fed and other central banks to raise interest rates or pare back bond buying more quickly than investors expect. That could drive bond yields higher, which could make stocks and riskier bonds less appealing than safer assets that for years have carried ultralow yields.

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.

He considered it a bullish bet on electric car makers like Tesla Inc. that use the metal in their batteries. After the ETF dipped 1.9% over a two-day stretch in early October, he doubled his position. It took six sessions for the ETF to get back to its pre-selloff level.

"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."

Write to Chris Dieterich at chris.dieterich@wsj.com, Ben Eisen at ben.eisen@wsj.com and Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

October 30, 2017 02:47 ET (06:47 GMT)