Why You Should Buy on Market Dips

Stocks tend to plummet because of worries about either economic weakness or rising interest rates - and then they climb, rewarding brave investors

John Rekenthaler 20 September, 2016 | 9:53AM
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Last week, the Wall Street Journal published a nifty little chart, courtesy of LPL Financial, that showed the U.S. stock market's improving powers of recovery. For 70 years, a one-day market decline of at least 2% elicited no visible reaction: On average, the market reacted to the drop by matching its long-term norms for the next one-week, two-week, and one-month periods. Buying after a steep one-day loss was neither a help nor a harm.

That has changed since the bull market started in 2009, in a big way. Since then, a one-day market dip has been followed by an average one-week gain of 1.3%. For one month, the profit is just more than 3%. Annualised, those figures amount to 45% for the one-month period, and double that to 90% for the one-week measure.

Blaming the Fed

The article states, "much of this [behaviour] is due to conditioning from the Federal Reserve." Stocks tend to plummet because of worries about either economic weakness or rising interest rates. Since 2009, when that has occurred the Federal Reserve has cooed soothingly, thereby lowering the expectation of an interest-rate hike and thus boosting the stock market.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.