History shows it has paid off to buy stocks after major plunges.
An investor buying the S&P 500 (^GSPC) 10% below its high, regardless of whether it was the trough, would have netted a median return of 15% over the next 12 months, according to new research going back to 1950 from Goldman Sachs (GS) strategist David Kostin.
Kostin notes there have been 33 S&P 500 corrections of 10% or more since 1950. The median episode has lasted roughly 5 months and encompassed a peak-to-trough decline of 18%.
A history lesson such as this is helpful for investors as they figure out what the next move is following a very volatile January for markets.
The Nasdaq Composite (^IXIC) is headed for its worst start to a January ever. At a 10% drop through Monday afternoon (aka the index is in a correction), the Nasdaq's January could surpass the 9.9% decline seen in January 2008, which had been the worst.
About 46% of the Nasdaq’s members are down at least 50% from their 52-week highs, according to Charles Schwab chief investment strategist Liz Ann Sonders. Zooming out doesn’t paint a better picture. Roughly 76% of the Nasdaq’s members are down at least 20% from their 52-week highs.
Meanwhile, stocks trading on sky-high valuations — mostly reserved to the tech space — have been slammed as traders model in lower-than expected future returns due to rising rates. AMD (AMD) shares have plunged 23% in January, Etsy (ETSY) has shed 33% and Netflix (NFLX) is off by 36%.
There are two parts to the 'buy-the-dip' phrase: Buy the dips and sell the rips.Interactive Brokers Chief Strategist Steve Sosnick
It's not just tech
Pain has been felt outside of tech, too. The Dow Jones Industrial Average (^DJI) and S&P 500 are down 4% and 6%, respectively in the month.
Within the Dow, 19 of its 30 components are down on the year, paced by more than 12% declines for Salesforce, Nike and Cisco.
Some of the most bullish moves in 2022 have come in perceived safe-havens such as consumer staples such as Coca-Cola (KO) (shares up 3% year to date) and gold (GC=F) (up slightly).
Despite the unknown further impact to stocks from rate increases actually kicking in this spring, pros are staying hopeful that the buy-the-dip investing tactic — in some form — will stay alive this year.
"There are two parts to the 'buy-the-dip' phrase: Buy the dips and sell the rips. We have kind of forgotten the second part of that. I think this is an environment you are going to get the opportunity to do both," said Interactive Brokers chief strategist Steve Sosnick on Yahoo Finance Live.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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