‘Buy the dip’ strategy will prevail in the current environment

One striking observation we can notice in the past cycle has been the speed at which the equity market recovers each time it experiences a significant drawdown (> 10%). For instance, while it took it took 7 years and 3 months and 5 years and 6 months in the past two economic recessions for the S&P 500 to recover to its previous highs, US equities recovered to their February 2020 peak in just 6 months after crashing by over 35% during the Covid19 panic.

As we previously mentioned, the drastic rise in liquidity to finance the high cost of lockdowns has been one of the major forces behind that historic rebound, and that a repeat of the 1930s period with stocks having a period of hope followed by a drastic selloff will be very unlikely this time.

Figure 1

Source: Eikon Reuters, FRED

Hence, market participants have constantly tried to buy the dip each time the market was experiencing a selloff. Figure 2 (left frame) shows that people were looking to buy stocks at the heart of the panic regardless of how dramatic the impact of Covid19 will be on the economic activity, especially on the service sector. Even though it has not always been a successful strategy in the past 100 years, ‘buy the dip’ has been a winning trade in the past 25 years (to the exception of 2002, 2008 and 2018); figure 2 (right frame) shows the average weekly performance of the S&P 500 following a negative week. If investors bought the dip in 2019 and 2020, they would have generated a positive average performance of 0.6% and 0.7%, respectively.

With another 3 trillion USD expected to reach markets this year (at least), we think that the ‘buy the dip’ strategy will prevail in the near to medium term.

Figure 2

Source: Eikon Reuters, Google Trend, RR calculations

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