Buying into the turmoil: Investors embrace the risks

WASHINGTON • Buy the dip. Be it stocks, bonds or more complex derivative bets, investors following this Wall Street maxim have reaped robust rewards in recent years.

Such buying has been evident in the shares of large American companies since March 2009, when the Standard & Poor's 500 stock index touched a low of 666. (It closed on Wednesday at 2,399.63.)

It also appeared when investors piled into European stocks after Britain's vote to leave the European Union last year. And the phenomenon has been amply illustrated by the wagering that the VIX index, a measure of how sharply investors think stocks will shoot up and down, will continue to move lower as it has done in recent weeks.

Yet as stock markets hit record highs and the yields on volatile junk and emerging market bonds plunge, this view that market corrections should be seen as a buying opportunity, as opposed to a warning to be heeded, has begun to worry investors.

The fear is that each subsequent rebound will embolden excessive risk-taking and inflate richly valued stock and bond markets.

Investors have repeatedly shaken off the risks of political turmoil. On Wednesday, the S&P 500 ended the day up 0.11 per cent, while the VIX was still near its decade lows, at 10.21. "No one has been penalised for buying the dip," said Mr Bill Luby, an independent investor and active blogger who specialises in trades connected to the VIX.

Until recently, he has been active in betting against VIX futures. Now, he is worried about what will happen when the dip becomes more severe than just temporary, and the index bolts higher as investors panic. "That trade is really loaded up," Mr Luby said. "It won't take much of a spike to cause a lot of pain."

Shorting, or betting against, the VIX is not the only trade of late where investors have been handsomely compensated for setting aside their fears.

Investors have been snapping up government bonds issued by countries such as Russia, Turkey and even Mongolia, enticed by mouth-watering yields and a perception that economic and political risks, which previously warned investors away, are no longer so severe. And in the United States stock market, few are predicting an outright market collapse.

Economic growth, in the US and abroad, is picking up, and the earnings for companies listed on the S&P 500 have been strong. And even with the political upheaval in Washington, most market participants remain convinced that the Trump administration's pledges for lower taxes and lighter regulation will provide ballast to the market.

Nevertheless, the combination of complacency and rising markets has prompted a growing number to become more cautious.

"We have been in a long up cycle and valuations are above average," said Mr Bradley Vogt, a portfolio manager for the Capital Group. "I am holding more cash than I usually hold in my funds right now."

Indeed, for all the ups and downs in the stock market over the past five years, the total return of the S&P 500 stock index is up close to 15 per cent - beating most of the opportunities available to investors.

"The view we frequently hear today is, 'aren't stocks expensive now given S&P price-to-earnings multiple', which is at a 15 to 20 per cent premium to the historical average," said Mr William Nygren from Harris Associates.

Making market-timing bets have been a "kiss of death" for investors over the years as stocks continue to rise over the long term, he said.

And that holds true today, he believes. "We have better economic growth looking forward the next five years than we do looking backward," Mr Nygren said. "And alternative asset classes offer returns that are exceedingly low."

NYTIMES

A version of this article appeared in the print edition of The Straits Times on May 12, 2017, with the headline 'Buying into the turmoil: Investors embrace the risks'. Print Edition | Subscribe