In the long run, the dips simply disappear from the charts or at least start to resemble harmless pauses for breath. Things are rarely as good as we hope or as bad as we fear, and I wonder whether, when the war is over, inflation has fallen back and Covid has finally been eliminated, we will look back on some of these price movements and wonder why we didn’t act on them. Like the 47pc fall in Cathie Wood’s Ark Innovation ETF, or, closer to home, the 32pc slide in the Scottish Mortgage investment trust share price in 2022. Here, it doesn’t make sense to look just at the averages but to seek out the more extreme examples of over-pessimism. It’s forecast that profits will have risen by nearly 9pc on average during that period, up from an expected 5pc at the start of the reporting round.Ī fifth argument for buying this dip is Mr Market’s tendency to overshoot. The good news on this front is that roughly halfway through the current reporting season (covering the three months from January to March), about 80pc of companies are beating expectations. So, what happens to company profits is clearly important. The price-earnings multiple is determined in part by price and in part by earnings, or profits. I don’t have the greatest conviction that this measure won’t fall a bit further yet, but it feels closer to the bottom than the top of its likely range. Last spring, investors were ready to pay maybe 24 times the earnings of America’s biggest companies.

This so-called price-earnings multiple has been falling for more than a year now. The equivalent measure of sentiment in the stock market is the multiple of earnings that investors are prepared to pay for a share of a company’s profits. I’d be surprised if bond yields go much higher than this for the foreseeable future. At 3pc, the income from a super secure 10-year US Treasury bond looks to have priced in pretty much all the interest rate rises that are currently spooking investors.Īgain, that’s a good sign. The measure I’m looking at today is the yield on safe government bonds. The bond market tends to be a better place to find these signals than the stock market because fixed income investors are natural pessimists and, as a result, better canaries in the coalmine than perennially optimistic equity investors. The second measure to look at is the extent to which investors have already priced in trouble ahead. Not always, because investors can get gloomy well before the market hits bottom, but often enough for sentiment to be a useful signal. That’s a good thing because there is usually an inverse correlation between the mood of investors and the future returns from stock market investments. Even in 2003 after the unwinding of the dot.com bubble, people weren’t this pessimistic. The percentage of investors describing themselves as bearish was last this high in 2009. Risk aversion is one of the best indicators that the time has arrived to get back into the market and sentiment has not been this weak since the low point of the financial crisis. Here are six reasons to believe that buying global shares’ 13pc dip since the start of the year will make sense - if not in the short run, then in due course. Today, the ground beneath our feet feels shakier. Two years ago, the arrival of the pandemic was an unexpected and unpleasant shock to an otherwise healthy market. And, given enough time, rising but volatile is what markets tend to be.īuying the dips is less obvious today than it has been because investors are worried that there might be something fundamentally wrong with the global economy right now. Buying the dips makes sense in a rising but volatile market.

Obviously, this is an unrealistic scenario, but you get the picture. If each investor puts £100 a year into the market on this basis, one will end up after five years with £560 and the other with £745, or a third more. But the scale of the outperformance may surprise you. Self-evidently, the one who buys the dips does better. Now imagine two investors, one of whom only invests at the top of those cycles and one at the bottom. To illustrate this, imagine a hypothetical market that rises by 10pc a year, with biggish annual swings between a 20pc gain and a 10pc decline. It’s not just the desire of the authorities to keep the show on the road that has encouraged the view that a correction is always an investment opportunity.

Don’t fight the Fed has been a profitable mantra. In the 14 years since the financial crisis, it has generally paid to assume that central banks or the government would ride to the rescue at the first sign of trouble in the markets.

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