The new coronavirus sweeping the globe since the start of the year could knock investors' go-to strategy for risk-off markets over the past decade — buy the dip, with a focus on U.S. equities — off its pedestal, analysts say.
In a worst-case scenario of countries beyond China, the virus' epicenter, having to follow its lead in shutting down material chunks of their economies to control the outbreak, the monetary policy elixir the U.S. Federal Reserve and other central banks have been serving up could fall flat, they predict.
This is not a typical "buy the dip" situation, given the significant uncertainty around the path of COVID-19 and its impact on economic growth and earnings per share, said Erik Knutzen, managing director and chief investment officer-multiasset with New York-based Neuberger Berman Group LLC.
Wild market gyrations over the two weeks through March 6 — a period that saw investors' first attempts to discount COVID-19's likely impact on U.S.-listed companies — suggest clarity is in short supply just yet. The market — after an initial week that saw the Dow Jones industrial average plummet more than 12% — took on a manic-depressive feel for the week that followed, with more than 1,000-point gains on March 2 and March 4 interspersed with declines of roughly 785 points on March 3, 970 points on March 5 and 257 points on March 6, for a 10.8% fall over the two-week period.
"It will take months for investors to gain clarity on this and over that time period, we expect volatility to remain elevated," Mr. Knutzen said.
Investors accustomed to central banks injecting liquidity into the system at any sign of market or economic stress "would be wise … not to see this as a reflexive buying opportunity," agreed Paras Anand, Singapore-based chief investment officer, Asia-Pacific, with Fidelity International, in a March 4 presentation.
At the end of the day, that effective monetary policy put has had "a greater impact on asset prices than on the economy, (and) investors are starting to question whether the playbook has … stopped working," Mr. Anand said.