Is it time to buy on dips? The selling pressure in the US stock market may be coming to an end
Goldman Sachs data shows that after a month of sharp decline, buying into the US stock market usually results in positive returns. The S&P 500 index has dropped by 8.5%, with the Costin team stating that a 10% pullback is a buying opportunity. JPMorgan Chase's quantitative strategist stated that institutional investors buy in when the stock market falls. Goldman Sachs predicts further global stock market declines, while Citigroup indicates that the economic recession has not yet been reflected in stock prices. Citigroup suggests buying on dips, but more signs of liquidation are needed
Goldman Sachs' analysis of 40 years of data shows that buying after a sharp drop in the US stock market over the past month is usually profitable.
According to data from Goldman Sachs' strategy team led by David Kostin, since 1980, the S&P 500 Index (SPX) has had an average return of 6% in the three months following a 5% decline from recent highs. The index has already fallen 8.5% from its peak in mid-July.
Kostin wrote in a memo, "A 10% pullback is often an attractive buying opportunity." Research shows that in 84% of cases, the S&P 500 Index has a positive return after a 5% decline.
On Tuesday, global markets regained some calm, with some hard-hit stock indices rebounding from the sharp drop caused by concerns about a US economic recession and extreme valuations in the technology sector.
According to JPMorgan's quantitative strategist, institutional investors bought around $14 billion during the market decline on Monday, and sold $6.7 billion by the close.
While Kostin's team did not make any recommendations in their findings, they warned that if the S&P 500 Index falls 10% in a resilient economic growth environment, the outlook would be "significantly different" from adjustments before an economic recession.
They pointed out that although economically sensitive cyclical stocks lagged behind defensive stocks in this month's sharp drop, the US stock market has not yet reflected an economic contraction.
In another report, Goldman Sachs strategists, including Peter Oppenheimer, stated that they expect global stock markets to decline further, although they do not predict a bear market, defined as a 20% decline from recent highs.
Meanwhile, Citigroup's strategist team warned this week that "the scenario of an economic recession is not reflected in prices at all."
Citigroup strategist Beata Manthey wrote in a report that the bank's "bear market checklist" (measuring stock valuations, yield curves, investor sentiment, and corporate earnings, among other indicators) suggests "buying on dips".
However, she also added, "Once we see more definitive signs of positions being cleared out, we will be more confident in doing so."