According to an analysis by Goldman Sachs Group, buying U.S. stocks after a significant decline, like the one observed in the past month, usually results in profits.
Goldman’s strategy team, led by David Kostin, analyzed over 40 years of data and found that since 1980, the S&P 500 index has returned a median of 6% over the three months following a 5% drop from its recent peak. The index has fallen 8.5% since its peak in mid-July.
According to Kostin’s report, while not as significant as a 5% drop, “adjustments of around 10% often present attractive buying opportunities.” The survey indicated that in 84% of cases, returns after a 5% drop were positive.
Following a sharp decline attributed to concerns over a U.S. recession and high valuations in technology stocks, a sense of calm returned to global markets on the 6th.
According to a quant strategist at JPMorgan Chase, institutional investors moved to buy the dip during the declines on the 5th.
Kostin’s team did not recommend buying based on these findings. They warned that the outlook for the S&P 500 following a 10% drop differs “significantly” depending on whether it occurs amid resilient economic growth or as part of an adjustment before a recession.
During this month’s decline, economically sensitive cyclical stocks were sold off more than defensive ones, yet U.S. stocks have not yet priced in an economic contraction.
Peter Oppenheimer and other strategists at Goldman, in a separate report, suggested that a bear market entering with a 20% drop from recent highs is unlikely, but they still expect global equities to decline further.
Additionally, Citi’s strategy team warned this week that “the recession scenario is not priced in.”
Strategist Beata Manci has stated in a report that their so-called bear market checklist, which measures indicators such as stock valuations, yield curves, investor sentiment, and profitability, encourages buying during declines, but ascertaining “a more complete unwinding of positioning would allow for more confident execution of that.”
Citi: Buying the dip is premature; the risks are leaning towards a further pullback.
Original title: Goldman Says Buying S&P 500 After 5% Drop Is Usually Profitable (Excerpt)