The other side of "Black Monday": "Smart Money" pouring into the US stock market, interpreting what "buying on dips" means
Against the backdrop of "Black Monday," large institutional investors have adopted a strategy of buying on dips. Hedge funds have swiftly snapped up U.S. stocks, putting an end to months of selling pressure. Institutional investors have net purchased $14 billion worth of stocks, leading to a 3% drop in the S&P 500 index. Market volatility is seen as an overreaction to economic data, as there is no conclusive evidence of an impending economic recession despite weakening economic indicators. The significant rebound in stock prices from the lows may indicate that hedge funds have identified signs of market overreaction. While signs of a market bottom have emerged, the stock market still faces issues of overvaluation
According to the information obtained by Zhitong Finance APP, against the backdrop of multiple circuit breakers in the Japanese and South Korean stock markets, as well as a widespread market crash on "Black Monday" globally, large institutional investors unexpectedly adopted a strategy on Monday that is usually only taken by retail investors: buying in a market downturn. Data from Goldman Sachs' brokerage business shows that while novice investors were pulling out of the market, hedge fund institutions, known as "smart money," were buying U.S. individual stocks at the fastest pace since March, ending months of selling pressure. Morgan Stanley's analysis also shows that institutional investors net bought $14 billion worth of stocks during the stock market decline, directly leading to a 3% drop in the S&P 500 index.
Professional traders choosing to return on the worst-performing day in the market has supported many bullish views, including the idea that market volatility is an overreaction to economic data. Despite weakening economic indicators, there is no conclusive evidence that an economic recession is imminent. The significant rebound from the lows in stock prices suggests that hedge funds may have identified signs of market overreaction. However, proving that professional traders have outperformed day traders is not sufficient based solely on Tuesday's rebound, as market valuations are high by almost all standards.
Max Goldman, Senior Vice President of Franklin Templeton Investment Solutions, metaphorically likened the situation to seeing a designer handbag on sale for 10% off. Although it is still expensive, you can tell yourself that it is a good deal.
On Tuesday, the S&P 500 index rose by about 1%, reclaiming some of the lost ground from the previous trading day - the worst performance in nearly two years. The Nasdaq 100 index also saw a similar increase. Wall Street's main fear gauge - the VIX index from the Chicago Board Options Exchange - retreated from its highest point since 2020, and the VVIX index of VIX volatility also declined in sync.
Looking at the closing prices before the Fed's decision last week, the recent sharp decline does not appear as severe after Tuesday's rebound. The 3.6% decline over five days is consistent with similar declines over the past five years.
Although Monday's market volatility may signal a market bottom, the exact situation remains unclear, and investor concerns persist. Earnings reports from major tech giants have raised doubts in the market about AI spending not correlating with short-term returns. The monthly employment report released last week has intensified concerns that the Fed may be late in cutting interest rates.
Goldman Sachs data shows that hedge funds have been withdrawing from individual stocks in recent months before professional investors returned to the U.S. stock market on Monday, with the nominal value of holdings in July marking the largest reduction since 2016.
Despite heavy market concerns, some investors believe that it is still too early to push the Nasdaq 100 index back and for the S&P 500 index to drop 7% from its peak due to anxiety about an economic recession. Data shows that during earnings season, profits of S&P 500 index component companies grew by 12% in the second quarter, with over 80% of companies reporting earnings exceeding expectationsJonathan Caplis, CEO of hedge fund research firm PivotalPath, said, "Many hedge funds see the current sell-off as a buying opportunity. Most of the managers we interviewed believe that the current issues are short-term and emotion-driven, rather than long-term issues with the fundamentals of listed companies or the entire U.S. economy."
Drawing from history, the recent pullback could indeed present an opportunity. David Kostin, from Goldman Sachs' strategic team, pointed out that since 1980, the average return of the S&P 500 index in the three months following a 5% decline from recent highs is 6%.
However, Kostin's team did not provide specific recommendations based on this research. They cautioned that in the case of a strong economy, the outlook after a 10% drop in the benchmark index is "clearly different" from the decline seen in the lead-up to an economic recession.
They also noted that despite growth-sensitive cyclical stocks underperforming defensive stocks in this month's sharp decline, the U.S. stock market has not yet shown signs of economic contraction.
Meanwhile, Citigroup's strategic team warned this week that "the scenario of an economic recession has not been reflected in prices." Citigroup strategist Beata Manthey wrote in a report that the bank's bear market checklist (measuring stock valuations, yield curves, investor sentiment, and profitability indicators) suggests "buying on the dip." However, she stated, "Once we see more conclusive evidence of unwinding positions, we will do so with more confidence."