Investors are approaching stock pullbacks with a reluctance last seen at the end of the dot-com era

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Investors are approaching stock pullbacks with a reluctance last seen at the end of the dot-com era, undermining the “buy-the-dip” strategy that many say has helped drive the longest bull market in U.S. history.


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Going back to the 1980s, the S&P 500 has typically rebounded after posting a weekly loss. This year, that trend has broken apart. The broad index has fallen an average of 0.04 percentage points on the day following weekly declines, marking the first time since 2002 that stocks have consistently slipped after one-week pullbacks, according to Morgan Stanley .

What’s troubling: The only years that stocks haven’t reliably rebounded following dips have been either at the start of or in the middle of a bear market, Morgan Stanley says. In some years, like 1982, 1990 and 2002, investors were hit by not just a bear market but also a recession.

Where’s the Rebound? – The S&P 500 has tended to fall this year after pullbacks, breaking away from the pattern of the past severalyears, where market dips were more consistently followed by rebounds. S&P 500’s average one-day return following a weekly decline

The diminishing lure of discounted stocks is the latest sign that investors, wary of a bull market that appears to be entering the late innings, are approaching selloffs with more caution than in years past. After suffering punishing setbacks throughout the week, the S&P 500 was down 1.5% for 2018, while the Dow Jones Industrial Average was down 1.3%. The two indexes initially rose Friday after data showed the U.S. economy on solid footing, only to tumble hours later.

“As you get later in the cycle, it becomes more challenging, because the dip may not be a chance to buy, but the start of the end,” said Joseph Amato, chief investment officer of equities at Neuberger Berman.

To be sure, many investors believe that the bull market will continue to grind higher throughout 2019. Although the U.S. economy has shown signs of cooling—particularly within the housing and auto sectors – it has remained firmly in expansion territory. And the Federal Reserve has shown signs of being open to pausing its rate-increase campaign earlier than investors had initially expected, something that helped U.S. stocks finish well off their lows Thursday.

Fears that tightening monetary policy would crimp corporate profits and diminish the allure of stocks kept major indexes under pressure for much of the past couple months.

Still, unease over how much longer the expansion can continue has pushed more investors to sit on the sidelines or trim their positions instead of using pullbacks as buying opportunities. Investors’ willingness to chase returns is likely to be even more diminished with just a little over three weeks of trading left to go in 2018—a narrow window for fund managers trying to catch up to their benchmarks.

Perhaps the starkest example of the buy-the-dip behavior fading has been in the technology sector. Last year, investors were mostly forgiving of pullbacks, betting that blips caused by everything from fears of regulatory scrutiny to worries about valuations were temporary, not signs of issues that should hurt prices over the long haul.


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Investors appear to have taken a more pessimistic view this year, shedding holdings of companies like Facebook Inc. and Nvidia Corp. , whose shares are both down more than 20% this year. Just 18% of fund managers say they have overweight positions in global technology stocks, according to a Bank of America Merrill Lynch survey released in November, down from 25% the month before and the lowest share since 2009.

In another sign that the wariness is likely to persist, some banks have begun to issue more conservative investment recommendations for their clients. Heading into 2019, BAML is suggesting that individuals willing to take on a moderate level of risk trim the weighing of stocks in their portfolio to 50% from 54% previously and bump up their cash holdings to 10% from 6%.