Buying the Stock-Market Dip Is Backfiring. Investors Keep Piling In Anyway.

The prolonged downturn is affecting the popular short trade, a strategy in which many investors found great success after the last financial crisis and especially during the rapid recovery from the pandemic.

Major stock indexes hit dozens of consecutive record highs, convincing many investors that any dip would be short-lived and an attractive buying opportunity.

Retail or non-professional investors have been enthusiastic buyers, piling in even as institutional investors exit. That buying fervor has been a major counterweight to the market, and if it falters, the stock could suffer even more.

The trade has backfired during the months-long slide that has dragged the S&P 500 down 23% through 2022, on track for its biggest annual decline since 2008. The sell-off accelerated last week as central banks across the interest rates increased around the world, causing strong fluctuations. in the stock, bond and currency markets. All three major US stock indexes fell at least 4%, their fourth drop of at least 3% in five weeks.

Many investors have been struggling with high inflation, ongoing war in Europe and the prospect of a recession. In the coming days, new data on spending and consumer confidence will provide clues about how high prices are shaping Americans’ behavior and the extent to which the Federal Reserve’s interest rate hikes are impacting the economy

Volatility has been stressful for many investors as they have watched their portfolios steadily decline in value week after week.

“I really beat myself up,” said Santi Tafarella, a 58-year-old community college professor in the Lancaster, Calif., area. “I’m uncomfortable.”

Mr. Tafarella said he has been buying the dip in the stock market, including on Friday, only to see his positions quickly worsen.

Other investors said they are holding on and haven’t pulled back from buying the dip yet, trying to keep a steady hand and keep an eye on long-term returns. At least one trend has persisted: Individual investors have tended to buy more shares of U.S. stocks and exchange-traded funds on days when the S&P 500 is down than when it’s up, according to Vanda Research.

That includes Sept. 13, when the S&P 500 fell 4.3% in its biggest one-day decline since 2020. Individual investors bought more than $2 billion of U.S. stocks and funds traded that day, the second highest total of the year. They bought $395 million of the SPDR S&P 500 ETF Trust that day alone, the highest one-day amount of 2022.

US households put more money into US mutual funds and ETFs than they took out during the year. US funds to see $89bn of net inflows in 2022, according to EPFR Global data analyzed by Goldman Sachs.

This is in contrast to many institutional investors who have taken money out of the market.

However, much of the euphoria that dominated the markets in 2020 has evaporated. A basket of stocks popular among individual investors that includes Tesla Inc.,

amazon.com Inc.

and chipmakers such as Advanced Micro Devices Inc.

and Nvidia body

it has fallen 30% this year, underperforming the broader market. Technology stocks are particularly sensitive to rising rates, leading to particularly steep losses.

Meanwhile, intraday trading between individuals, as defined by daily dollar volume, has fallen to levels not seen since January 2020, before the pandemic, according to analysts at Vanda Research. Activity by individual traders in call options, popular bets to profit from a rise in stocks, has fallen to some of the lowest levels in two years, according to Deutsche Bank data.

“The frenetic, frothy behavior is not there,” said Lule Demmissie, US chief executive of brokerage eToro. “But this long-term thesis of long-term investing is.”

Some of the momentum-driven trades that flourished over the past two years have resulted in huge losses for investors. Trying to buy the dip in Cathie Wood’s ARK Innovation ETF,

for example, it has been particularly painful.

Shares in the fund rose as much as 3.2% on Wednesday as traders piled in, hoping for a rally after a continued sell-off that has now dragged it down 60% this year. Instead, the fund ended the day with about the same amount after the Fed’s interest rate decision led many traders to quickly change their forecasts about how aggressive the central bank would be later in the day. to increase rates during the coming year. The rate hike triggered a sharp market-wide sell-off.

The ARK ETF drew $197 million in inflows on Wednesday, the most in a single day since July, according to FactSet. The fund resumed its slide on Thursday, falling 4.3% and heading for a double-digit decline for the week.

Caleb Adams, an 18-year-old college student who said he started investing a few years ago through a custodial account, a type of investment account for minors, said the ARK fund has been one of their biggest losers.

“I fell into the trap of high-growth, high-flying companies and put money into their ETFs, and they haven’t done very well,” he said.

Even so, Mr. Adams, who started investing by buying Tesla stock, said he has tried to keep putting money into his brokerage account regularly. The cash he received for his high school graduation helped him increase his market exposure, as did the money he earned doing odd jobs for his parents, how to organize business contacts electronically for your mother.

Mr. Tafarella said his approach has changed dramatically since the depths of the Covid-19 pandemic, when he tried his hand at day trading with little success. He hoped to make enough money to help pay for his daughters’ college education and protect his family from the burden of student loans.

“I started out feeling very greedy,” said Mr. Tafarella “I thought, I could probably turn this into $100,000 in a year.”

Since then, he’s switched to a basket of diversified ETFs that he’s been putting money into consistently.

One factor that is changing the calculus for some investors: ultra-safe government debt suddenly looks attractive. High inflation and Fed rate hikes have fueled a sharp sell-off in the bond market, sending yields to the highest levels in a decade.

Claire de Weerdt, a 34-year-old consultant and business owner based near Vancouver, British Columbia, said she bought a fund that tracked stocks and bonds earlier this year to diversify her holdings, even though the value of the bottom has fallen together with the wider one. market He has also parked some cash in a fixed-income investment for his business and tried to build a bigger cash reserve in case of a recession. Still, he said he has no plans to sell his shares.

“I think it would be foolish to sell shares,” Ms. de Weerdt said. “I don’t care what the markets are like in a year or two. I don’t care what they look like in 30 years.”

Write to Gunjan Banerji at gunjan.banerji@wsj.com