The announcement of broad, indiscriminate tariffs on Wednesday afternoon triggered major selling across global markets, most acutely in the U.S., as the Nasdaq fell 6%, the S&P dropped 4.8% and the small-cap Russell 2000 fell 6.6% into bear market territory.
China’s response—commensurate 34% tariffs on imports from the U.S. announced just before the market opened Friday morning—triggered a fresh round of selling, as U.S. indexes were again markedly lower, with the Nasdaq now in a bear market and the Dow and S&P Equal-Weight indexes in corrections.
Most assets (with the exception of gold and Treasurys) are well off their highs, but investors should resist the temptation to “buy the dip,” at least for the time being.
There will come a time, possibly soon, when it becomes prudent to go through the bathwater to try and pick up some inadvertently discarded babies, but we need to give the dust some time to clear first.
My colleague Chris Preston and I discussed our respective views on the tariff fallout on the latest episode of our Street Check podcast on Friday, but the actionable advice was the same from both of us.
In Chris’s words: “Don’t be a hero.”
I encourage you to listen to the discussion in full at the link above, but the one item to reiterate here is that there’s still too much uncertainty around the path forward to be confident that the market is capitulating into a buyable bottom.
The announcement Wednesday picked a tariff fight with the whole world, but so far, only China has offered a meaningful response.
It’s also unclear whether the tariffs are a negotiating tactic or are intended to be a long-term policy position.
If it’s the former, and you opt against buying the dip immediately, you may miss out on some of what could be a V-shaped recovery. If it’s the latter, then the market is not yet pricing in the full effects of broadly higher prices for importers (and how those will be passed on to consumers), or new barriers to global trade for U.S. manufacturers or service providers.
But market conditions coming into this correction were already unfavorable for buyers.
The Buffett Indicator, for instance, showed historically overbought levels, as did the S&P 500 PE ratio (forward PE above 22; highest level since 2001).
Retail investors were also very heavily allocated to U.S. stocks (a contrarian bearish signal).
In short, the markets were priced for perfection, or close to it. And that makes it a bad time to try and play the hero and pile into stocks. But there are a few exceptions.
Don’t Buy the Dip … Unless
If you’re practicing dollar-cost averaging and incrementally buying regardless of market conditions, carry on.
That also applies to buying through your 401(k) or longer-term retirement accounts, where you may have years or decades for a recovery to play out.
The same is true if you’re averaging into a stock that was favorably valued before the sell-off.
The important thing is not to let fear or greed override your existing system.
If you’re using a momentum-based trading strategy, wait for your indicators to give you a buy signal. That’s what Mike Cintolo is recommending to his Cabot Growth Investor subscribers.
Ultimately, my suggestion isn’t to panic sell or avoid buying because the sky is falling, it’s to keep a cool head during a tough market.
Sticking to your existing strategy is a good way to force yourself to avoid making rash decisions, and those tend to be the worst decisions in hindsight—in investing and life in general.
And, if you’re looking to implement a system that’s going to tell you when it’s safe to start meaningfully adding to your portfolio again, there is a wide range of Cabot advisories that can help.
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