Rather than bouncing back from a slump, stocks have continued to fall, burning up investors who stepped in to buy stocks on offer. The S&P 500 is down an average of 1.2% on the week this year after losing at least 1% on the day, according to Dow Jones Market Data. This is the largest such decline since 1931.
The ongoing downturn is weighing on popular buy-the-dip trading, a strategy that many investors had great success with after the last financial crisis and especially during the lightning-fast recovery from the pandemic.
Major stock indices hit dozens of consecutive records, convincing many investors that any downturn would be short-lived — and present an attractive buying opportunity.
Retail or lay investors were avid dip buyers and accumulated even as institutional investors exited. That buying appetite has been a key counterbalance for the market — and if it wanes, stocks could suffer even more.
Trading has backfired during the month-long downturn that has dragged the S&P 500 down 23% so far in 2022 on its way to its biggest annual decline since 2008. The sell-off accelerated last week as central banks focused on the Raised interest rates around the world and triggered sharp fluctuations across stock, bond and currency markets. All three major US stock indexes fell at least 4%, their fourth drop of at least 3% in five weeks.
Many investors are grappling with high inflation, an ongoing war in Europe and the prospect of a recession. In the coming days, new data on consumer spending and confidence will provide clues as to how high prices are affecting American behavior and the extent to which Federal Reserve rate hikes are penetrating the economy.
The volatility has turned many investors’ stomachs as they have watched their portfolios steadily decline in value week after week.
“I’ve really taken a beating,” said Santi Tafarella, a 58-year-old community college professor in the Lancaster, California area. “I do not feel well.”
Mr Tafarella said he bought the dip in the stock market – including on Friday – only to see his positions quickly sour.
Other investors said they’re holding on and haven’t pulled out of buying the dip just yet to keep a steady hand and keep an eye on long-term returns. At least one trend has continued: According to Vanda Research, retail investors tended to buy more shares of U.S. stocks and exchange-traded funds on days when the S&P 500 fell than on days when it rose.
That includes Sept. 13, when the S&P 500 plunged 4.3% in its biggest one-day decline since 2020. Retail investors bought more than $2 billion in US stocks and exchange-traded funds that day, the second-highest amount of the year. They bought $395 million of the SPDR S&P 500 ETF Trust that day alone, the highest daily amount of 2022.
US households have put more money into US mutual funds and ETFs than they have withdrawn over the year. According to EPFR Global data analyzed by Goldman Sachs, US funds generated $89 billion in net inflows in 2022.
That’s in contrast to many institutional investors who have pulled money out of the market.
But much of the euphoria that dominated the markets in 2020 has evaporated. A basket of popular stocks among retail investors that includes Tesla inc,
and chip manufacturers such as Advanced Micro Devices inc
and NVIDIA corp
is down 30% this year, underperforming the broader market. Technology stocks are particularly sensitive to rising interest rates, leading to particularly large losses.
Meanwhile, intraday trade between individuals, defined by daily dollar volume, has fallen to levels not seen since pre-pandemic January 2020, according to analysts at Vanda Research. Activity by individual traders in bullish call options, popular bets to take advantage of a rise in stock prices, has fallen to some of the lowest levels in the last two years, according to Deutsche Bank.
“The frantic, frothing behavior isn’t there,” said Lule Demmissie, US head of brokerage house eToro. “But this long-term thesis of investing long-term is it.”
Some of the momentum-driven trades that have thrived over the past two years have caused investors big losses. Try buying the dip in Cathie Wood’s ARK Innovation ETF,
for example was particularly painful.
On Wednesday, shares in the fund rose as much as 3.2% as traders bailed on hopes of bouncing back after a prolonged sell-off that has now dragged it down 60% this year. Instead, the fund ended the day down about the same amount after the Fed’s interest rate decision prompted many traders to quickly revise their forecasts of how aggressively the central bank would hike rates next year. The rate hike triggered a sharp sell-off across the market.
According to FactSet, the ARK ETF saw $197 million in inflows on Wednesday, the most in a single day since July. The fund continued its slide on Thursday, falling 4.3% and heading for a double-digit decline for the week.
Caleb Adams, an 18-year-old college student who says he started investing through a custody account, a type of underage investment account, a few years ago, said the ARK fund has been one of his biggest losers.
“I fell into the trap of high-growth, high-flying companies and put money in their ETFs and they didn’t do very well,” he said.
Still, Mr Adams, who started investing by buying Tesla shares, said he’s tried to keep stashing money in his brokerage account on a regular basis. The money he earned for graduating from high school helped him increase his presence in the market, as did the money he earned doing odd jobs for his parents. like the electronic organization of business contacts for his mother.
Mr Tafarella said his approach has changed dramatically since the depths of the Covid-19 pandemic, when he tried his hand at day trading with little success. He hoped to make enough money to pay for his daughters’ college education and protect his family from the burden of student loans.
“In the beginning I felt very greedy,” said Mr. Tafarella. “I figured I could probably turn that into $100,000 within a year.”
Since then, he’s transitioned to a basket of diversified ETFs that he’s consistently invested money in.
A factor that is shifting the calculus for some investors: ultra-safe government bonds suddenly look attractive. High inflation and the Fed raising interest rates have triggered a sharp sell-off in the bond market, pushing yields to the highest levels of the last decade.
Claire de Weerdt, a 34-year-old consultant and business owner based near Vancouver, British Columbia, said she bought a fund that monitors stocks and bonds to diversify her holdings earlier this year, although the fund along with the broader fund has fallen in value Market. She’s also parked some money in a fixed income investment for her company, trying to build a larger cash buffer in the event of a recession. Still, she said she has no plans to sell her shares.
“I think it’s stupid to sell shares,” said Ms. de Weerdt. “I don’t care what the markets are like in a year or two. I’m interested in what they will look like in 30 years.”
Write to Gunjan Banerji at [email protected]
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