History shows that it has paid off to buy shares after major dives.
An investor buying the S&P 500 (^ GSPC) 10% below its peak, whether tied up, would have achieved a median return of 15% over the next 12 months, according to new research dating back to 1950 from Goldman Sachs ( GS) strategist David Kostin.
Kostin notes that there have been 33 S&P 500 corrections of 10% or more since 1950. The median episode lasted about 5 months and included a peak-to-valley drop of 18%.
A history lesson like this is useful for investors as they find out what the next step is after a very volatile January for the markets.
The Nasdaq Composite (^ IXIC) is heading for its worst launch on a January ever. With a 10% drop through Monday afternoon (also called the index is in a correction), Nasdaq’s January could surpass the 9.9% drop in January 2008, which had been the worst.
About 46% of Nasdaq’s members have fallen at least 50% from their 52-week highs, according to Charles Schwab’s investment strategist. Liz Ann Specials. Zoom out does not paint a better picture. About 76% of Nasdaq’s members have dropped at least 20% from their 52-week high.
Meanwhile, stocks traded at sky-high valuations – mostly reserved for the tech area – have been hit as traders model in lower-than-expected future returns due to rising prices. AMD (AMD) shares have fallen 23% in January, Etsy (ETSY) has fallen 33% and Netflix (NFLX) has fallen by 36%.
There are two parts to the ‘buy-the-dip’ phrase: buy dips and sell currants.Interactive Brokers Chief Strategist Steve Sosnick
It’s not just technology
Pain has also been felt outside of technology. The Dow Jones Industrial Average (^ DJI) and the S&P 500 have fallen 4% and 6% a month, respectively.
Within the Dow, 19 of its 30 components have declined compared to the year, with more than a 12% decline for Salesforce, Nike and Cisco.
Some of the most bullish moves in 2022 have come in perceived safe havens such as consumer goods such as Coca-Cola (KO) (stocks rose 3% year to date) and gold (GC = F) (a slight increase).
Despite the unknown further impact on equities from interest rate hikes that are actually kicking in this spring, professionals remain hopeful that the buy-the-dip investment tactic – in one form or another – will remain alive this year.
“There are two parts to the ‘buy-the-dip’ phrase: buy dips and sell currants. We’ve kind of forgotten the other part of it. I think it’s an environment you get to do. Both , “said Interactive Brokers chief strategist Steve Sosnick on Yahoo Finance Live.
Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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