Investors have been active stock-market participants since the start of the pandemic and seem committed to buying the dip.
While factors such as inflationary fear and the impending rise in interest rate in the near future amidst the Fed tapering still linger around, the US stock market is showing no signs of weakness. The S&P 500, Dow 30, Nasdaq Composite and Nasdaq 100 are all trading at higher levels and continue to gain strength. S&P 500, Dow 30, Nasdaq Composite and Nasdaq 100 are up by between 2.5 per cent and 5.95 per cent over the last 3 months and between 17 per cent and 23 per cent year-to-date.
Is ‘Buy the Dip’ phase keeping the markets robust and is the FOMO factor also at play keeping the indices higher? Lisa Shalett, Chief Investment Officer, Wealth Management, Morgan Stanley, in her Lisa Shalett’s Global Investment Committee Weekly report touches upon this aspect in depth.
One of the key reasons among the more plausible theories, according to her, is that the retail investors could still be playing an outsized role in supporting the market, driven in part by a “fear of missing out” (FOMO) on the next big rally. These investors have been active stock-market participants since the start of the pandemic and seem committed to “buying the dip,” or purchasing securities at depressed prices based on the expectation that they’ll rise again.
Since the pandemic began, retail daily net inflows have been averaging about $1 billion—three times the roughly $360 million average during 2018 and 2019.
But individual investors may not have much firepower left. Morgan Stanley Chief Cross-Asset Strategist Andrew Sheets notes that after a historic surge in consumer savings earlier in the pandemic, the amount of cash on household balance sheets, as a percentage of total assets and net worth, is now back at levels consistent with averages since 1989.
Sheets also notes that equity holdings—generally the most volatile asset that households own—are now at their all-time high as a percentage of household wealth. This means that while it’s still possible for people to put more money into the market, many may decide that they already have enough exposure at this point.
Although retail investors can still influence market dynamics, we continue to see various risks that the markets appear to underappreciated and that the FOMO urge is unlikely to resolve. In particular, investors should keep an eye on weakening market liquidity and tightening financial conditions.
The Fed is likely to begin tapering its asset purchases, reducing the current monthly pace of $120 billion by $20 billion to $30 billion per month through next June. Additionally, the U.S. Treasury will be authorized to restart issuing debt following the lifting of the federal debt ceiling, which may drain as much as $720 billion from the system.
To many investors looking for lower valuation to enter or add good quality US stocks of established companies, any dips and corrections could be an opportunity to invest for the long term.