Is that a dip or a rip?

Stocks had a wild day yesterday closing mixed as investors assessed earnings and awaited today’s inflation figures. Bonds traded higher yesterday with 10-year Treasury Note yields falling below 3%, a psychological number for growth stocks.

What gear comes next? Based on my recent writing, you have probably recognized a pattern that has called for patience and long-term focus. Those are not meant to be calming words as much as a reminder that the numbers have proven those strategies to be long term winners. I want to be clear however, that being patient and long-term oriented does not mean that we should put our portfolios on auto pilot or in set-and-forget mode. As one might guess, I have been receiving many phone calls from clients asking if they should sell. My advice today is no different than my advice for when stocks were in raging bull mode. One should always seek to sell stocks that have not performed to expectations and have poor prospects. Though that may seem simple, we all know that it is not. Sometimes a bad earnings release can cause a stock to sell off, but if one digs deeper, it may be found that the stock’s quarterly loss may be an anomaly and the expected longer-term trend is still in line with expectations. In that scenario, selling the stock reactively may prove to be a mistake for a long-term investor. That is a circumstance where I would say that a stock is cheap for the wrong reason. In other words, yes, the company under-performed for the quarter, but its prospects remain solid. Now, there are situations in which a company misses earnings targets, lowers its forward guidance, and is struggling with its business model. We have seen some of those announcements in recent weeks despite an overall strong earnings season to date. Those stocks are the ones that we should consider trimming or selling altogether. Ok, ok I know that is obvious, but many investors are still reticent to sell poorly performing company stocks, after the overall market has sold off. I hear many excuses like “it is down so much; I will sell it the first time it pops.” My answer to that excuse is typically “would you wait to treat an infection, only once it gets a little better?” Of course, not. That strategy is likely to lead to the loss of limbs if not one’s life.

There is one other scenario I want to touch on today. You have probably heard me use the old Wall Street saying that “all boats go down in the ebb tide,” which means that all stocks, even good ones go down when markets sell off. In this scenario there are companies which have solid performance, solid business models, and continue to have great expectations for future growth, but have sold off along with the broader market. Stocks of that sort are cheap for the wrong reason, and long-term investors should hold on to those. I know what you are thinking. “Should I buy those stocks outright or should I add to my existing position you ask?” That is a common strategy, and it aligns naturally with human nature, it is, of course, referred to as “buying the dip.” With markets so volatile recently, I have not received many of those calls yet, but I can sense that those questions will soon begin to pick up. It is true that stocks are generally cheaper after recent routs, but the question is, can they get cheaper yet? Right now, the Price/Earnings multiple of the S&P 500 is 20.4, which is cheaper than last year’s 24.59. While we are looking back, 2020 sported a P/E of 30.29! The year prior to the pandemic ended with a PE of 20.83. So, yes stocks, in general are cheaper now than they were last year or the year before. On whether it is time to back off the truck and load up, we must widen our viewing angle yet further. The longer-term mean P/E ratio of the S&P500 going back to the late 1800s is around 16, however that number has trended higher in recent years. Forward estimates for 2022 have the S&P closing out the year with a P/E of 17.56 (cheaper than current) and 16.7 for 2023. In other words, stocks can get cheaper yet. Volatility will eventually calm down and markets will again start to demonstrate a clear trend. If that trend is positive with increasingly higher highs and higher lows, that will be the time to buy stocks which are cheap for the wrong reasons. Stay focused.

Yesterday’s Markets

Stocks had a volatile session yesterday in which growth stocks outperformed value for a change, which is likely due to dip buying and lower bond yields. The S&P500 gained +0.25%, the Dow Jones Industrial Average slipped by -0.26%, the Nasdaq Composite Index gained 0.98%, and the Russell 2000 Index lost -0.2%. Bonds climbed and 10-year Treasury Note Yields lost -4 basis points to 2.99%. Cryptos gained +3.23% and Bitcoin added +0.13%.


  • Consumer Price Index (April) may have slowed to +8.1% from +8.5%, year over year. The expected monthly gain is expected to be +0.2%, also lower than the previous month’s +2.5% growth.
  • After the closing bell, we will get earnings from Disney, Marqeta, Rivian, Sonos, Bumble, and Beyond Meat.


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