(Adds commentary, updates prices)By Lewis Krauskopf and Sin?(C)ad CarewNEW YORK, Oct 6 (Reuters) - Scooping up stocks afterpullbacks has been a winning bet for investors over the pastdecade but some Wall Street strategists are pointing to amultitude of risks that could come with jumping into equitiesafter their latest tumble.
The S&P 500 has notched 25 total pullbacks of at least 5%since the start of 2012, according to Ryan Detrick, chief marketstrategist at LPL Financial. Over that time, the index hasgained more than 240%, bolstering the case for investors willingto step in during episodes of weakness.Bargain hunting has already been in evidence. The S&P 500bounced back about 1% since Monday, when a sharp sell-off sawthe index end more than 5% below its closing record high, in itsbiggest drawdown so far in 2021. The buyers included retailinvestors, who have purchased an average of $1.2 billion instocks per day so far this week, up from their average,according to Vanda Research.And JPMorgan strategist Marko Kolanovic on Wednesday wrotethat the COVID-19 pandemic was at an "effective end" and urgedinvestors to buy the dip in economically sensitive cyclicalshares that would benefit from broad economic improvement. Others, however, worry that buying the latest dip may comewith more near-term risks than before as investors face a bevyof headwinds, from the looming unwind of the Federal Reserve's$120 billion a month government bond-buying program to aprotracted battle among lawmakers to raise the U.S. debtceiling.Analysts at BofA Global Research on Tuesday cautioned that"the coast appears far from clear" as the Fed prepares to winddown the easy money policies that had helped the market doublefrom last year's lows as early as August. BofA's target on theS&P 500 is 4,250, some 2% below Tuesday's close.
The risks of a more hawkish Fed also concerned analysts atMorgan Stanley, who on Monday said the S&P 500 could fall asmuch as 20% if the economy and earnings "cool off" as the Fedtightens.
Shawn Snyder, head of investment strategy at Citi US WealthManagement, said a nasty fight among U.S. lawmakers to raise thecountry's debt ceiling or throw the nation into default iscurrently the key near-term risk equities face.
"The buy-the-dip strategy still works but there (are) veryspecific things that are lingering that need to be clearedfirst," Snyder said.Additional risks run the gamut from a recent surge in energyprices to worries over the meltdown of heavily indebted Chineseproperty developer China Evergrande Group. The S&P 500 is up15.5% so far this year.Buying the dip has "certainly worked for people over thelast 10 years," said JJ Kinahan, chief market strategist at TDAmeritrade in Chicago. However, "at some point things stopworking, especially when people do them time after time."
STOCKS IN SEASON?One scenario outlined by Morgan Stanley's strategists seesthe S&P 500 falling by about 10% as the Fed tightens monetarypolicy due to rising inflationary pressures. In a secondscenario, the economy and earnings slow as the Fed tightens,leading to a 20% swoon.
"Bottom line: faster tapering with a greater deceleration ingrowth implies a greater than 10% correction," Morgan Stanleyanalysts said.Despite those worries, however, historical evidence showsthat a market powered by strong momentum tends to keep rising.The S&P 500 has notched a positive fourth quarter nearly 80% ofthe time in years during which it has climbed more than 12.5% inthe first nine months, according to LPL's Detrick, delivering amedian fourth-quarter gain of 5.2%.Seasonal trends also could provide reasons to buy soonerrather than later. While September lived up to its historicalreputation of being the weakest month with a 4.8% decline,October is traditionally stronger, with the seventh-highestaverage gains for the S&P 500 since 1950, according to the StockTrader's Almanac.
November ranks second in monthly performance, with the indexrising 1.7% on average, and December third, with equities rising1.5%, according to the almanac.JPMorgan's Kolanovic, meanwhile, wrote investors should usethe recent pullback as an opportunity to buy emerging anddeveloped market equities with the exception of high-growth andtechnology shares.
(Reporting by Lewis Krauskopf and Sin?(C)ad Carew, additionalreporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili andNick Zieminski)