The question of whether to buy the current dip is intrinsically associated to the outcome of Russia’s invasion of Ukraine, writes Mohamed A. El-Erian in an opinion piece for Bloomberg. If an offramp is soon taken by Putin, the market could bounce back into a long-term rally, but if the war persists, more market volatility is likely.
The war has further aggravated a rocky start to the year. Major U.S. stock indexes are down anywhere from 10-18% this year and top indexes in Europe are down 15%, while emerging markets indexes are down 12%. While buying the dip has long been a profitable approach—one that retail investors looked inclined to continue after the start of the war—those purchases are now colliding with selloffs from institutional investors, making the approach a less effective way to build and keep the momentum from a short-term bounce. As inflation threatens to rise over the next few months and the Fed is forced to tighten its monetary policies, markets will become much more exposed to the four levels of economic impact from the war, which El-Erian lists as: “direct repercussions on Russia and Ukraine, spillbacks to advanced countries, spillovers to developing countries, and changes in the functioning of the multilateral system.” The longer the war goes on, the greater the impact of these four effects.
If Putin doesn’t find his way out soon, one way or another, commodity markets and supply chains will continue to be disrupted, and those disruptions will become worse and worse. The U.S. economy will slow, as well as China’s, and Europe could be propelled into an inflationary recession. Developing nations could see foreign-exchange and debt crises, and the entire global economy could see a recession brought on by stagflation. And most countries, El-Erian contends, are not prepared to deal with it.
Without at stop to the war in Ukraine, more disruption is on the horizon—and that’s not a comfortable place to be for investors who continue to buy the dip. Instead, investors should use this time to concentrate on individual stock selection, while preparing “for a future of greater dispersion in global economic performance,” El-Erian concludes.
