Buy the Dips Is So … Last Month

Investors’ habit of bagging stocks during temporary slips could be going away, El-Erian warns.

Buying the dips has been a standard strategy throughout the pandemic rally. But Mohamed El-Erian thinks that could be over.

In his view, not scooping up relative bargains when the stock market drops may explain why September thus far has been so choppy for equities. “Until very recently, the behavioral aspects of this market were ‘buy the dips, there is no alternative, and fear of missing out,’” said El-Erian, Allianz’s chief economic adviser. “Those three came together, and every single fall was quickly reversed.”

Analysts have floated any number of reasons for the sudden negative reaction in the market recently: uneasiness about high inflation, doubts about what the Federal Reserve will do and when, and suspicion that the long rally is getting old and frail. To El-Erian, who previously headed bond house PIMCO, the source of this seeming pullback isn’t easy to divine, yet he urged investors to pay attention to the psychological forces at play.

“What we’re not seeing the last few days—this month, in fact—is that behavior” of buying on the dips, El-Erian told CNBC. “Now, part of it could be because the inflation jitters put in doubt the ability of the Fed to orderly, orderly, normalize. Part of it may be elevated prices. Part of it may be it’s temporary.”

While the S&P 500 rose 0.85% Wednesday, this month—usually the worst of the year for the market—has had a rocky start. Every trading day last week was down, for a minus 1.7% weekly return on the S&P 500. This week has been topsy-turvy, with Monday registering a small gain of 0.23% and Tuesday off 0.57%, and then yesterday’s hop up. All that said, the broad market index is still ahead 19.3% for 2021.

During this market advance, investors have stuck with stocks as the best possible bet in a time of low interest rates and the anxiety that comes with not wanting to miss out on future gains. That has resulted in two telling acronyms, TINA and FOMO. The first, of course, means “there is no alternative,” in a slighting reference to bonds and other asset classes, and the second stands for “fear of missing out.”

“All I can tell you is you have to be a behavioral scientist because the last leg in asset prices has been really behavioral, has been people believing that if they don’t buy now, they’re missing out on an opportunity,” El-Erian said. As the pandemic got underway early last year, and the market went into free fall, El-Erian advised against buying the dips because he foresaw an even bigger drop ahead.

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