Stock slide cheers up bargain hunters

Before Tuesday, S&P 500 had fallen by 1% or more only three times in 2019.

  • By Asjylyn Loder,
  • The Wall Street Journal
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This week’s stock-market decline is offering investors something they haven’t seen much of this year: a dip to buy.

The long-running bull market has been sustained in part by investors who have used every downturn as a buying opportunity. But the persistent upward drift this year has offered bargain hunters few such chances—until now.

Escalating trade tensions with China sent major U.S. benchmarks lower Tuesday. The S&P 500 (.SPX) declined 1.7%, the Dow Jones Industrial Average (.DJI) lost 1.8% and the tech-heavy Nasdaq (NDAQ) fell 2%.

Stocks just completed their best four-month start in 20 years, but the gains left investors wary of buying high. The S&P 500 has advanced on almost two-thirds of the trading days so far this year. Before Tuesday, it had fallen by 1% or more only three times, and two of those declines were in January.

On Sunday evening, futures prices suggested stocks could tumble when they opened Monday, and Asian markets slumped before the U.S. opened. But the sharp declines turned out to be short-lived, with the S&P 500 closing Monday just 0.4% lower. The selloff resumed Tuesday after Washington doubled down on its threats to ramp up tariffs on Chinese goods.

“Most people were waiting for a drop in the market to put money back to work, and the speed and the velocity of the way we bounced off December lows caught everyone off-guard,” said Jack Janasiewicz, a portfolio strategist at Natixis .

Investors parked money on the sidelines during the late 2018 rout and have been slow to jump back in despite the rally.

The S&P 500 index is up about 15% since the start of the year, and the tech-heavy Nasdaq has climbed about 20%. Yet assets in money markets, a proxy for cash, rose to levels not seen since the waning days of the financial crisis, and bond funds are still raising money at a rapid clip, according to data from the Investment Company Institute. Meanwhile, funds that invest in U.S. stocks have shed $21.3 billion.

Professional money managers are likewise bearish. Bank of America Merrill Lynch’s (BAC) sell-side indicator, a measure of Wall Street’s bullishness, slid to a six-month low of 57.6 in April, the firm said in a research note this month.

The pessimism is at odds with the economy. The Federal Reserve agreed last week to hold benchmark interest rates steady, signaling confidence in the U.S. economy. First-quarter growth was stronger than expected, and U.S. unemployment has declined to its lowest rate in almost 50 years.

“I hear this mantra over and over again, that we’re late in the cycle,” said Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch. “We’ve all been bracing ourselves for the end of this bull market, which means that we’re not done yet.”

The pessimism may mean it is a good time to buy, said Ms. Subramanian. The bank’s sell-side indicator is often contrarian, and markets tend to rise when money managers are bearish. There is some evidence that investors are coming around. U.S. equity exchange-traded funds raised $20 billion in April, while money came out of safety assets such as gold, according to FactSet.

There is some evidence that investors are coming around. U.S. equity exchange-traded funds raised $20 billion in April, while money came out of safety assets such as gold, according to FactSet.

Three S&P 500 ETFs took in a combined $7.4 billion, and the Invesco QQQ Trust (QQQ), which invests in Nasdaq-listed stocks, garnered $1.9 billion. Higher-risk sectors such as finance and technology also picked up new assets.

But ETF flows offer an incomplete picture of market sentiment. When mutual-fund flows are factored in, the view appears decidedly more bearish.

Having missed out on the rally, investors are now worried they are too late, said Nick Kalivas, senior equity ETF strategist for Invesco.

“The market hasn’t pulled back, and it hasn’t made it easy for investors to climb on board,” he said. “There’s been no real dip to buy.”

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