`No Panic' Mantra in Stock Rout Is the Latest Grist for Bears

(Bloomberg) -- Somehow, amid a stock selloff that erased $2 trillion from U.S. equities in 10 days and caused volatility to spiral, clients at investment firms have kept their heads. Not everyone is convinced that’s great news.

The willingness of unflappable investors to buy the dip has cushioned every downturn for nine years, and was playing out again Monday, if gingerly. Bears have another name for it -- complacency -- and say it masks a shifting economic picture with the potential to end the bull market.

“The market becomes less overvalued, and everybody jumps in -- that’s complacency,” said Brian Frank, portfolio manager at Key Biscayne, Florida-based Frank Capital Partners LLC. “At some point, fundamentals will be the only thing that matters, and it will burn everybody who’s ignoring them.”

While market tranquility was shattered last week and the pace of client inquiries rose, few strategists or fund managers say anyone is panicking. Instead, they reported getting phone calls from investors who, while alarmed by the speed of the correction, wondered if it was a chance to dive back in.

On Wall Street and beyond, they’ve been nearly unanimous in describing steadfast clients. “I didn’t have to necessarily talk anyone off the ledge, like ‘Oh my god, should I sell everything?’" Mona Mahajan, U.S. investment strategist for Allianz Global Investors, said Friday. According to Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance in Charlotte, North Carolina: “I didn’t have a lot of people saying ‘Oh my god, this is crazy,’ so I’m assuming they felt the same way I did, which was: ‘wow.’"

Added Jack Ablin, chief investment officer at Cresset Wealth Advisors LLC: “I bought into the selloff on Friday morning and I encouraged others to do so as well. The market was 15 percent overvalued, we had a 10 percent correction. What, is the market 5 percent overvalued? It’s technical noise in my books.”

At one level, saying it’s bad when investors feel good is a parlor trick of bears: if people aren’t selling everything, they must be blind. Is that really worse than a panicked exodus? At the same time, the potential for deluded faith may actually be higher now, after years of near-zero-percent interest rates spurred one of the biggest -- and calmest -- stock rallies ever seen.

Stocks jumped Monday, helping the S&P 500 erased more than half of Thursday’s 3.8 percent plunge. Price turbulence measured by the Cboe Volatility Index slipped for a second day even as rates on 10-year Treasury yields briefly hit a four-year high.

More than anything, it’s surging bond rates -- and the inflationary forces they signify -- that leads some to worry this episode is different. With no acquiescent Fed to bail them out, using stretches like last week to gorge on shares becomes a far riskier proposition. Gone is the force that kept everything predictable.

“One change is the volatility question,” said Katrina Lamb, head of investment strategy and research at Bethesda, Maryland-based MV Capital Management Inc. “You have higher levels of volatility, which means the risk of this happening more often, which means at some point that the people who are trying to play the buy the dip might get caught out.”

There were signs last week that faith in buy-the-dip went beyond just the retail class of investors and was shared by the professionals. Three U.S. prime brokerages including Credit Suisse Group and JP Morgan Chase said in client research that rather than bail as selloff deepened, traders made only minor adjustments in an effort to stay fully invested -- at least as of Wednesday.

Not everyone has been prepared to stick it out. According to EPFR Global data cited in a Bank of America note, U.S. equities saw record redemption of $33 billion during the week through Feb. 7. Stocks entered a correction the next day, loosely defined as a drop from 10 percent from a past high.

“This is the first real test after the last 10 years of complete tranquility,” Chad Morganlander, a portfolio manager at Washington Crossing Advisors, said by phone. “Rates are starting to go higher, which can create additional pressure on equities. As interest rates march higher, investors may be losing out not only on the stocks expectations -- they will have to shift their thinking that the stocks market is the only place to invest.”

To contact the reporters on this story: Elena Popina in New York at epopina@bloomberg.net, Kailey Leinz in New York at kleinz1@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi, Namitha Jagadeesh

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