Should You Buy the Dip?

The "buy-the-dip" strategy has been very successful for U.S. stocks over the past five years. U.S. stock returns during this period were unusually high compared to longer timeframes.

There's nothing wrong with buying on dips, as it follows the idea of buying low.

However, it's important to do more than just blindly buy every dip.

At Capital Squared, when making a buy decision, we focus on whether a stock or fund is truly a good value when it dips. For example, if a stock goes from being very overvalued to just slightly less so, it might not be a good buying opportunity. On the other hand, if a fairly valued stock becomes cheap, it could be a great investment.

Politics aside, these are some of the questions we are considering right now.

Is the market turbulence due to a growth scare?

Unlikely.

Typically, during a growth scare, cyclical commodities like oil and copper, international stocks, and high-yield bonds (often called junk bonds) perform poorly. So far this year, most of those categories have done well, including international stocks. We recognize that if the market isn't currently expecting slower growth, any signs of growth cooling could lead to further losses.

We'll be watching key growth indicators to see if they weaken and match other signs of a slowing economy. It's clear that uncertainty has increased a lot since the start of 2025. In terms of the tariffs that were put in place earlier this week, it remains to be seen if such policies will remain in place for some time or be renegotiated in a matter of weeks or months.

As a reminder, the 2018-2019 tariff war had a significant impact on the markets, which is similar to the turbulence we experienced over the past several weeks. The U.S. stock market was down -6.24% in 2018, but once the negotiations restarted, it gained +28.88% in 2019. In short, tariffs created short-term challenges, but once agreements were made, volatility subsided and stock markets regained momentum.

What is the impact of weaker consumer confidence?

Both the University of Michigan and Conference Board confidence surveys have declined, missing Wall Street’s predictions. However, sentiment surveys can be unpredictable, so we need to see if a steady downward trend develops.

As shown in the chart below, which tracks the Conference Board index, there isn't a clear pattern yet. Still, this is an important metric to keep an eye on since the U.S. economy is over 70% driven by consumer spending.

To what extent will U.S. corporate earnings results impact the markets?

U.S. corporate earnings are beginning to slow down. This can be expected after over two years of above-average performance and earnings growth. Individual companies like Walmart have also indicated that tariff uncertainty poses a risk. Walmart’s full-year guidance through January 2026 was weaker than Wall Street’s expectations due to this uncertainty.

Each week, we learn more about the new administration's economic policy, including tariffs, and we will certainly keep you updated as things progress. There is a possibility that international stocks, which have been undervalued, will become attractive.

What does this mean to you?

At least as of the date of this newsletter, we do not believe the most recent market volatility presents many buying opportunities. There are certainly some exceptions, which are best covered in individual client meetings so that this newsletter is not perceived as financial advice.

International markets may become interesting for investment purposes soon. We are just not there quite yet.

We continue to believe that Treasury Inflation-Protected Securities (or TIPS) are important to consider given the uncertain inflation outlook and the potential impact of tariffs.

If growth eventually begins to slow down, longer-term bonds can offer more protection than short-term bonds or money market funds.