Stocktake: Strategists wary of ‘buying the dip’

Investing at market lows has been winning formula but coronavirus provides unusual challenge

The "buy the dip" trade has been a winning one for years but Allianz economist Mohamed El-Erian has been vocal over the last month that it's not a good idea in the current climate.

Not everyone agrees – JP Morgan made the case for buying last Thursday and is sticking to its bullish year-end forecast – although it’s striking how many strategists echoed El-Erian’s caution last week. One can see why.

Firstly, the usual market remedy – rate cuts – can help with a demand shock, but not so much with a supply shock.

"China has closed a reported 70,000 movie theatres because of the virus," notes Unicredit. "That's a supply shock" and no amount of stimulus will boost ticket sales.


Secondly, US earnings were flat last year but stocks soared, notes Pension Partners' Charlie Bilello, as valuation multiples expanded from 16.5 to 20.7. A lot of earnings growth was baked into market prices – that's not good, given Goldman Sachs now expects no earnings growth in 2020 on account of the coronavirus.

Thirdly, there’s just so much uncertainty. Predicting the course of the coronavirus “is sure to challenge even the most accomplished medical scientists”, notes Vanguard, so strategists are wise to keep an open mind as to what’s in store.