Should You “Buy the Dip?”

The market’s plunging again this morning as fears over “second wave” lockdowns intensify. Investors paused their selling yesterday as bulls attempted to find their legs.

But today, the flood gates have opened once more. The Dow, S&P, and Nasdaq Composite are down 3%, 2.9%, and 3%, respectively. In Europe, where equities also fell, the German Dax sunk 4.4% to a 5-month low.

Meanwhile, the French CAC 40 dove 4% while the FTSE 100 in London endured a 3.2% loss of its own.

With Covid-19 cases rising, Western investors are cashing out. But it’s not the infections themselves that have bulls flipping bearish. Instead, the market fears renewed lockdown restrictions – the ever-present, rally-killing source of risk that could derail the U.S. economic recovery at a moment’s notice.

In Germany, Chancellor Angela Merkel has already called for a limited lockdown. France is expected to issue a stay-at-home order, too.

And these aren’t just European countries doing this, either.

In the U.S., the state of Illinois ordered Chicago restaurants to shut down indoor dining in what could be the first of many additional restrictions.

“I think there’s going to be a call for lockdowns the likes of which we’ve seen in Chicago,” said “Mad Money” host Jim Cramer.

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“The lockdowns without the stimulus equals what we’re seeing. It’s a shame because had there been stimulus, we’d then be focusing on earnings and the earnings are actually pretty darn good.”

Could today’s rout put additional pressure on lawmakers to strike a pre-election stimulus deal? Maybe, maybe not.

But even if they did come to terms, the actual stimulus would be unlikely to arrive until after Election Day.

Still, some analysts believe the market has some good things going for it longer-term in the wake of a solid earnings season.

“Uncertainty about COVID-19-related mobility restrictions and US politics means we should expect volatility to remain elevated for the balance of the year,” explained Mark Haefele, chief investment officer for global wealth management at UBS.

“However, we continue to see upside over the medium term. With ten vaccine candidates in late-stage trials globally, our central scenario is that restrictions can start to be lifted by 2Q21, helping corporate earnings recover to pre-pandemic highs by around the end of 2021.”

The second quarter of 2021; that’s how long Haefele thinks the lockdowns will last. Will investors be able to handle a “frozen” economy until then?

Or, more importantly, will citizens abide by the new rules?

Enforcing restrictions for that long should prove to be a tough endeavor for some governments. In the U.S., more conservative members of the population are already hesitant to toe the line.

Harsher lockdown measures would likely result in a very negative – possibly even destabilizing – reaction over the next few months.

But for the time being, uncertainty alone has been enough to cause some heavy selling. The Dow, in particular, lingers in dangerous territory near its September low.

And while that may give traders pause, it also could be an early sign of a recovery rally. That September low is key support for the index and may serve as a “launchpad” for a short-term boost higher.

So, if stocks turn things around in the coming days, don’t completely ignore all bullish opportunities. The market isn’t in “crash mode” quite yet. Until it is, traders should try to remain calm.

And, more importantly, be ready to jump on low hanging fruit.

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