Stock market turmoil and volatility instill panic in many investors, but others see opportunities for profit opening up. Bank of America says that many of its clients have been buying tech, health care and financial stocks as the stock market has dipped this month. While the S&P 500 Index (SPX) shed 2.2% of its value during the week ending last Friday, its biggest weekly drop since December, the bank's clients added a net $4.7 billion to their equity positions, their biggest weekly buying spree so far in 2019, according to Bloomberg.

“Strong inflows (even when excluding buybacks) indicate clients were likely expecting a benign resolution on trade,” a team of equity strategists at BofA Merrill Lynch, led by Jill Carey Hall, wrote in a note to clients, as quoted by Bloomberg.

Buying On Signs of Trouble

The buying spree also reflects a detailed strategy mapped out several weeks ago by JPMorgan and other investors who were waiting to buy on signs of trouble as the stock market neared its peak. The group included computer-driven funds which had the potential to buy $250 billion of stocks as they did before the post-Christmas rally. “When talking to clients, we don’t find many truly convinced bears at this point, but rather investors who would like to add at ~5-10% lower levels and capture a return to new all-time highs,” said JPMorgan strategists led by Marko Kolanovic, in a note to clients cited in an earlier Bloomberg article.

The table below summarizes BofA's key observations about the "buy the dip" action among its own clients last week. Note that other data sources have pointed to net selling of equities in recent weeks. According to Lipper, in the three weeks ending Wednesday, May 8, cumulative net redemptions of $21.8 billion were recorded by equity mutual funds and ETFs, whether they hold U.S. stocks, international stocks, or both.

Bank of America Clients Are "Buying The Dip"

(Trading Week Ending Friday, May 10, 2019)

  • Net purchases of equities: $4.7 billion
  • Net buyers included both retail and institutional clients
  • Buyers generally put money into specific stocks, rather than funds
  • Hedge funds were net sellers, however
  • Biggest net buying action in tech, health care, financials
  • Net selling of utilities, equity ETFs, energy stocks

Source: Bloomberg

Significance For Investors

BofA clients also were net buyers of industrial and materials stocks. Given that both cyclical stocks and stocks with significant exposure overseas were among those enjoying the heaviest net buying action last week, this can be taken as an indication that BofA clients are, on the whole, optimistic that the U.S.-China trade dispute will be resolved in a satisfactory fashion for the markets, Bloomberg observes. Whether China's subsequent announcement of retaliatory tariffs shakes that confidence remains to be seen.

Looking Ahead

There are a number of factors that could put a floor under stocks amid the trade turmoil, and which could push the market higher if the U.S. and China reach a deal. The first is the Federal Reserve's dovish stance, and the second is better-then-expected corporate earnings. With 90% of the S&P 500 companies having reported 1Q 2019 earnings, 76% beat EPS estimates and 59% beat revenue estimates, though aggregate earnings for these companies are down by 0.5% year-over-year, FactSet Research Systems reported on May 10.

If the U.S. and China can reach a trade deal, these positive forces could help push the markets sharply higher -- and thus lead to handsome returns for many stocks bought on the dip.