Raindrops hang from a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York, New York, U.S., October 26, 2020. REUTERS/Mike Segar

NEW YORK, Feb 25 (Reuters) – U.S. stocks are attracting buyers after a recent tumble, but some investors believe buying the dip this time around could be a much riskier bet than in the past as markets face headwinds. geopolitical conflicts and a hawkish Federal Reserve.

The benchmark S&P 500 index (.SPX) jumped more than 6% from Thursday lows to close higher this week, after investors rushed after a sharp decline following the invasion of Ukraine by Russia. Read more

On the surface, the rapid rebound resembled past rebounds the index has seen on its more than 200% run over the past decade, when “buying the dip” proved a winning strategy.

The S&P is down 8% year-to-date and confirmed it was in a correction as it fell more than 10% from its high at the start of the week – its biggest drop since stocks lost nearly a third of their value during the March 2020 COVID-19 selloff before doubling from their lows.

Yet, while bargain hunters over the past two years could count on the Fed’s historically loose monetary policy to support stocks, they now face heightened geopolitical uncertainty and a central bank that is expected to put everything in its fight against inflation – starting with a widely anticipated rate hike in March.

“Investors were trained to buy the dip because they had Fed support. But now you can argue that this is one of the most important geopolitical events of the last decade, and you don’t have the Fed in your corner,” said Burns McKinney, senior portfolio manager at NFJ Investment Group.

Anticipation of Fed tightening has weighed on markets in recent weeks, with investors anticipating an interest rate hike of around 165 basis points by next February. Fed Chairman Jerome Powell said he expects to raise interest rates in March for the first time since 2018. FEDWATCH

Others expect geopolitical tensions to continue to plague markets as the implications of the war in Ukraine become clearer.

Kyle Bass, founder and chief investment officer of hedge fund Hayman Capital Management, believes investors still haven’t considered all of the possible outcomes that could result from Russia’s invasion of Ukraine, including conflict. which weighs on global growth and pushes up inflation by driving up commodity prices.

“It will get worse before it gets better,” he told Reuters in a recent interview. “Asset managers don’t have these results in their realm of possibilities.”

Bass said investors should own assets that can retain value in times of inflation, such as commodities and real estate.

McKinney is buying dividend-paying stocks that he believes will weather future market volatility and funnel money into defense companies.

In addition to the rapidly changing situation in Ukraine, investors will be watching Friday’s nonfarm payrolls data for February next week — the last jobs report the Fed will see ahead of its monetary policy meeting in February. March.

Although Ukraine remains in flux, proponents of buy-on-weakness argue that the decline in stocks due to past geopolitical events was short-lived. LPL Financial’s study of 37 major geopolitical events since World War II found stocks rose an average of 11% a year later, provided a recession did not occur.

Retail investors were among the bottom buyers, buying a net $1.5 billion on Thursday, according to data from Vanda Research. Read more

BlackRock (BLK.N) earlier this week added to its strategic overweight in equities, saying investors may be overestimating how hawkish central banks will have to be in their fight against inflation. Analysts at JPMorgan (JPM.N), meanwhile, argued that “the initial volatility around the rate hike did not last and stocks hit new all-time highs 2-4 quarters later.”

Others, however, are taking a more austere view, as Fed market prices tighten in the face of soaring inflation.

“We are bearish,” analysts at BofA Global Research wrote in a recent note, saying they believe the “bullish era of central bank excesses, Wall St inflation (and) globalization was ending, to be replaced by a “bearish era”. of inflation and geopolitical isolationism.

Charles Lemonides, portfolio manager of hedge fund ValueWorks LLC, raised bets against some stocks, including semiconductor maker Broadcom Inc (AVGO.O) and plant-based meat company Beyond Meat Inc, skeptical of the ability of markets to support a recovery in the face of a hawkish Fed.

“The reality is that the market has had a huge run and inevitably you give back some of those gains,” he said.

Reporting by David Randall; Additional reporting by Ira Iosebashvili; Written by Ira Iosebashvili; Editing by Richard Chang and Chris Reese

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