‘Buy The Dip’ Believers Tested By Market’s Downward Slide
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‘Buy The Dip’ Believers Tested By Market’s Downward Slide

Small investors continue to pour money into stocks despite the grimmest outlook in years for interest rates and a possible recession.

By GUNJAN BANERJI
Wed, May 11, 2022 11:23amGrey Clock 8 min

This year’s stock market volatility has turbocharged a favourite strategy among individual investors: buying the dip. The dramatic plunge in major indexes will test their resolve.

On Thursday, when the stock market had one of its worst days of the year, individuals rushed in, setting a one-day buying record. In March, they invested the largest-ever monthly sum, according to Vanda Research data beginning in 2014, and continued to pour money into the markets in April.

Investors followed suit on Tuesday in a volatile session, a day after the S&P 500 fell to its lowest level this year. The broad stock-market gauge swung before edging up 0.2%, snapping a three-session losing streak.

Individuals’ willingness to backstop markets throughout this year’s selloff demonstrates that the group—for now—has been more resilient than analysts and trading professionals anticipated. Few were surprised when individual investors pounced on small dips as the market churned higher last year, helping the S&P 500 cruise to 70 records and rewarding those who waded in.

This year, the S&P 500 has fallen 16%, its worst start to a year in nearly a century, and the Nasdaq Composite has dropped 25%. Inflation is at a 40-year high, and the Federal Reserve has embarked on an aggressive monetary tightening cycle, enacting this month its biggest rate increase since 2000. That has fanned worries about a recession—periods when stocks have on average fallen as much as 29%, according to Dow Jones Market Data.

Some of the wildly popular trades of the past two years have already crumbled. Many investors have soured on richly valued technology stocks. Newly minted public companies, which soared last year, have come back down to earth. Highly speculative corners of the market, such as Cathie Wood’s flagship ARK Innovation exchange-traded fund, have plummeted.

Despite the turning tides, many individual investors said they have relished the chance to buy stocks at a discount. Many said the calculation is simple: History has shown that stocks eventually go up.

Small investors ploughed US$114 billion into U.S. stock funds through March as the S&P 500 tumbled into a correction, falling at least 10% from its high, according to Goldman Sachs Group. That marks a sharp shift in the group’s strategy for much of the past two decades. Typically, individual investors have sold about $10 billion in the 12 weeks after a market peak when the S&P 500 has tumbled that much.

In the month of March alone, individual investors bought about $28 billion of U.S.-listed stocks and exchange-traded funds on a net basis—the total amount after subtracting the amount sold—the largest monthly sum on record, according to Vanda, and another net $24.4 billion in April. On Thursday, when the S&P 500 tumbled 3.6%, individual investors bought a net total of nearly $2.6 billion of stocks and ETFs, a one day record, according to Vanda.

John Case, a 71-year-old retired engineer in Las Vegas, said he has tried to follow famed investor Warren Buffett’s advice to be “greedy only when others are fearful” and to hold stocks for long periods of time.

He said he has often stepped into the market during times of volatility and learned this lesson the hard way when he sold some of his shares during the 2008 financial crisis. That plunge was followed by an 11-year bull market during which the S&P 500 surged roughly 400%. Now, he said he is more confident in his strategy.

“When the market zigs, I zag,” Mr. Case said.

He has steadily increased his exposure to stocks since he stepped out of the workforce, he said. About two-thirds of his portfolio is in stocks, up from around half when he retired.

Mr. Case recently picked up shares of software company Adobe Inc. and Microsoft Corp., which have both recorded double-digit losses this year. Since he bought the shares, though, they have fallen even further, weighing on a retirement portfolio that has already slid in value this year.

Many individual investors who bought the stock-market dip are sitting on losses. Through April, the S&P 500 fell an average 0.2% during the session after it notched a loss, according to Jason Goepfert at Sundial Capital Research, making 2022 one of the worst years for buying the dip since 1974.

Unlike the crash of early 2020, which lasted just 23 trading days, investors are weathering a more prolonged selloff that could worsen as recession risks grow. The Fed’s move to raise rates and shrink its $9 trillion asset portfolio has already triggered a selloff in the government-bond market, sending the yield on the benchmark 10-year U.S. Treasury note jumping past 3% to its highest level since 2018. Higher yields typically chip away at the stock market’s allure by giving investors another attractive place to park their cash.

Individual investors’ appetite for stocks diverges from the behaviour of professional investors, who have collectively sold stocks during the turbulence. JPMorgan Chase & Co. estimates that institutional investors have pulled $199 billion out of the stock market this year, according to an analysis of public order flow data through Friday. Meanwhile, pros keep ramping up bearish bets against major U.S. equity indexes through the futures market, analysis from Citi Research shows.

That hasn’t stopped many individual investors from wading in. Their allocation of stocks in their portfolios crept up to nearly 70% last month, hovering around the highest levels since early 2018, according to a survey by the American Association of Individual Investors. Many individual investors whittled their exposure to bonds, sending fixed-income allocations to a 14-year low.

Some market strategists say that retail investors’ appetite for buying could continue to help support stocks, blunting the impact of severe down days. Goldman analysts forecast that U.S. households will buy $150 billion in stock in 2022, following last year’s record of roughly $390 billion.

Demand could deteriorate if the economy sours. Households have pulled around $35 billion from stock funds since early April, as the selloff accelerated, the firm said.

The rising value of their stockholdings and homes over the past two years has made some investors feel more comfortable taking bigger risks, financial advisers said. Home prices logged a record jump in 2021, while the S&P 500 has still soared almost 80% from its March 2020 low, thanks in part to the Federal Reserve’s Covid-19 stimulus measures that led to a boom in asset prices world-wide.

Pandemic-era stimulus checks and a reprieve from student-loan payments also helped some people stockpile cash. Some are also beginning to reap the benefits of the greatest wealth transfer in modern history, with older generations expected to hand down trillions of dollars in the coming decades.

“They just have more money,” said David Sadkin, a partner at Bel Air Investment Advisors, who oversees about $4.6 billion for high net-worth clients. “We did not see the kind of ‘hit the exit, hit the eject button’ that we’ve seen in the past.”

Mr. Sadkin said his clients have seemed concerned about the latest leg of the selloff but that there hasn’t been any “panic selling.”

Concerns about inflation and Fed policy have already led to sharp stock plunges this year. So far, several of those selloffs have been followed by some of the most dramatic rebounds of the past decade.

On Feb. 24, investors dumped stocks as the Ukraine crisis intensified, sending the Nasdaq Composite down by more than 3% intraday. As stocks hit their lows during the session, a familiar pattern emerged: Investors piled in, helping the index claw back its losses and sending it up to close 3.3% higher than the previous day.

Investors purchased nearly $1.5 billion of U.S. stocks and ETFs that day on a net basis, according to Vanda, higher than the 2022 daily average of nearly $1.3 billion. This year, individual investors’ 10 biggest buying days by dollar volume have occurred when the S&P 500 has fallen rather than risen.

The strategy of picking up stocks and other investments on sale has grown so popular that the term “buy the dip” has mushroomed into an online sensation, garnering millions of mentions on social-media platforms. The growing entanglement of investing and social media means that even sharp plunges can bring on calls of FOMO—fear of missing out.

In January, when stocks suffered their worst month since the early days of the Covid-19 pandemic, and prices of assets including stocks, bonds and bitcoin slid, many investors turned to platforms such as Twitter and Reddit to tout the strategy, leading to more than 200,000 mentions across social media, according to social-media management company Hootsuite. That’s more than 30 times the figure three years ago.

On Monday, as the S&P 500 finished its worst three-day stretch since March 2020, the term started trending on Twitter again.

Chris Johnson, a 30-year-old individual investor who runs an online trading community called The Wealth Squad, has been among those encouraging small traders to remain steadfast. “Every asset class has a down cycle,” he tweeted in April, on a day when the S&P 500 dropped 1%. “Those who survive the down cycles come out of the cycle much wealthier.”

Mr. Johnson, an army veteran turned full-time trader who splits his time between Houston and Las Vegas, has taken advantage of recent market swings to scoop up shares of companies he plans to hold for the long haul. That has helped him amass large positions in companies such as Roblox Corp., Coinbase Global Inc. and Shopify Inc.

Each of the stocks has fallen much further than the broader market, with all three down at least 70% this year. His Roblox and Coinbase positions are now worth about $185,000 and $30,000, respectively. Still, he said he isn’t worried because he believes the companies are industry leaders and the stocks will eventually rebound.

He said he has used the more recent market turmoil to double down on cryptocurrencies, which have tumbled alongside stocks, to help bring down the average cost of tokens in his portfolio. At the moment, he said, “I see opportunities in crypto that I’m not seeing in the stock market.”

Mr. Johnson said he has been trying to be more diligent in taking profits in his own portfolios. In addition to stocks and cryptocurrencies, he said he also has a portfolio of real-estate properties.

Some strategists say buying the dip is a risky way to invest because it is so difficult to gauge whether the market is going to keep falling. Vanda estimates the average individual investor portfolio peaked late last year and has since tumbled, giving the average individual a paper loss of about 28%.

This year’s turmoil has spurred some individual investors to pull back on trades that have soured. After years of investing in index funds, Do Kim, a 45-year-old accountant near Philadelphia, began actively investing in stocks and options in spring 2020, pouring hundreds of thousands of dollars into the market. He won big through options trades and buying dips in technology stocks, and he said his portfolio swelled.

The wild swings in the market this year have tested his belief in the strategy. He has sold some of his losing bets, which include personal-finance company SoFi Technologies Inc. and insurance firm Lemonade Inc., which have both lost more than half of their value this year. At times, he bought the dip in stocks only to have them tumble further.

He said he has recently backed away from the strategy, wary that stocks could fall much further and that there may be a recession on the horizon. “I’ve had a lot of sleepless nights for sure,” he said. For now, he is still holding his Tesla Inc. and Nvidia Corp. shares.

Online brokerages including Robinhood Markets Inc. have reported a slowdown in customer trading activity in recent weeks.

Chief Executive Vlad Tenev said on the firm’s April earnings call that it faced a “challenging macro environment, one most of our customers have never experienced in their lifetimes,” noting that for most of its history, “Robinhood has operated in a period of low interest rates, low inflation and rising markets.” He said that while larger customers are still remaining active, many other customers have become more cautious with their portfolios and are trading less frequently.

Some traders are still looking to make bold bets. At brokerage Webull Financial, traders are flocking to some of the riskiest products designed to profit from market volatility. Trading in exchange-traded funds offering leverage, or turbocharged exposure to stocks and other assets, makes up around half of all ETF trading on the platform, Chief Executive Anthony Denier said.

Matt Wyskiel, who manages money for several individuals at Skill Capital Management in Baltimore, has sought to magnify his exposure to the stock market in his personal portfolio through derivatives and ETFs that profit if volatility edges lower, he said. Those bets stand to win big if stocks rise and volatility falls—and they can also backfire if market turbulence rises.

“I’m calling it a stocks-plus strategy,” Mr. Wyskiel said. He said market volatility this year hasn’t triggered a shift in his strategy. “The best course of action often is to buy and hold and ride it out.”

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 10, 2022.



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Nike Reverses Course as Innovation Stalls and Rivals Gain Ground

Shoe giant stumbled as CEO John Donahoe pulled away from retailers and relied on old hits. Now it says it’s refocusing on cutting-edge footwear for athletes.

By INTI PACHECO
Tue, Apr 23, 2024 10 min

In late February, Nike boss John Donahoe led a virtual all-hands meeting where he delivered a message to his staff: The company wasn’t performing at its best and he held himself accountable.

Two weeks earlier, Nike had announced it would lay off more than 1,600 employees .

Now, as the CEO spoke at the meeting, critical comments started to fill the chat window on the Zoom call while more than 20,000 employees watched.

“Accountability: I do not think that word means what you think it means,” an employee wrote. “If this is cost cutting, how about a CEO salary cut?” another wrote. Soon a cascade of laughing emojis filled the screen.

Some colleagues warned others that their posts weren’t anonymous and the chat might be monitored. The attacks went on for several minutes. “I hope Phil is watching and reading this,” an employee wrote, referencing the retired Nike co-founder Phil Knight .

The virtual protest illustrated the depths of the dissatisfaction within the sneaker giant and concern for its strategy. “How did we actually get here?” wrote one product manager.

Since the pandemic, Nike has lost ground in its critical running category while it focused on pumping out old hits and preparing for an e-commerce revolution that never came. The moves, current and former employees say, have eroded a culture of innovation and edginess that made Nike one of the world’s best-known brands.

Donahoe had told The Wall Street Journal in 2020 that his No. 1 priority when taking over the company was “don’t screw it up.” Four years later, the company is unwinding key elements of the CEO’s strategy that have backfired as a growing number of upstarts nip at its heels.

Among the reversals: As Covid raged and more shopping moved online, Nike cut ties with longtime retail partners such as DSW and Urban Outfitters and tried selling more merchandise directly to consumers. It is now asking some of those stores for help clearing out its overstuffed shelves and warehouses.

“I would say we got some things right and some things wrong,” Donahoe said Thursday, in an interview at Nike’s Beaverton, Ore., headquarters.

Losing its roots

The strategic missteps have animated a debate inside the company about its identity. In its zeal to boost digital sales, some current and former employees say, Nike veered from its roots as a maker of cutting-edge footwear for serious athletes. It has opened itself to competition from newcomers such as On and Hoka, which have borrowed from the playbook that fuelled Nike’s rise—including focusing on sport over lifestyle, and taking risks on innovation.

Nike’s once torrid growth has stalled . Sales for the quarter ended Feb. 29 were flat compared with a year earlier, and shares in the company have declined 24% over the past year, compared with a 19% gain in the S&P 500.

Donahoe in the interview acknowledged the brand lost its “sharp edge” in sports and needed to boost its “disruptive innovation pipeline.” The CEO said the brand’s marketing got fragmented and that with people going back to bricks-and-mortar stores, it was clear Nike needed to invest in its retail partners.

Nike executives said in interviews that the company became too cautious after the pandemic and overly reliant on older products that were reliable sellers. They said the company has made significant changes in recent months to refocus it on putting out cutting-edge footwear.

“We were serving consumers what they know and love,” said John Hoke , Nike’s recently named chief innovation officer. “The job is to of course do that but also to show them something new, take them someplace new.”

Donahoe said Nike is going through a period of adversity and layoffs that has created uncertainty, but that the company will get through it. “Our employees have been through a lot,” he said. “Nike is actually at its best, like a great sports team, when our backs are against the wall.”

Knight, who is chairman emeritus of the board and the company’s largest shareholder, said in a statement that Donahoe has his “unwavering support.”

Donahoe said employees’ responses to the all-hands meeting reflected one of Nike’s biggest strengths: how much its staff cares about the company. “We welcome and encourage that,” Donahoe said.

Shift into digital

Donahoe took over Nike just before the pandemic, at a delicate time. Though he inherited a market leader and one of the world’s best-known brands, Nike was seeking a refresh after it dealt with complaints about its workplace culture that led to a management shake-up .

The Evanston, Ill., native had been CEO of eBay , where he doubled the e-commerce platform’s revenue during a seven-year stint that ended in 2015. After a sabbatical—during which he says he had a life-altering experience at a 10-day Buddhist silent meditation retreat—Donahoe went on to run cloud-computing company ServiceNow .

When he took the helm of Nike in early 2020, his marching orders from Mark Parker , his predecessor and current executive chairman, and Knight were clear. He was to turn the world’s biggest shoe maker into a tech company more directly connected to consumers through its own apps, which in turn collect valuable data from shoppers.

Parker said when he stepped down that Donahoe was the right candidate to lead Nike’s digital transformation.

Donahoe was just the fourth CEO in the company’s more than 50-year history. The only other outsider to get the job said he was ousted in 2006 after a short stint because he focused too much on the numbers .

Donahoe started out with a 100-day global listening tour that was cut short after a month when the pandemic hit.

Covid lockdowns fuelled a surge in online shopping. Digital channels accounted for 30% of Nike’s sales in May 2020, about three years ahead of schedule.

Donahoe saw it as an acceleration of an inevitable shift and adjusted Nike’s plans accordingly. A few months in, he redoubled the company’s bet that it could make more money by selling products directly to consumers through its stores and digital channels. He said he believed digital sales would reach 50% of the business, and Nike should transform faster to define the marketplace of the future. It was time to act.

By late 2020, Nike dropped about a third of its sales partners and sold less merchandise to clients such as Foot Locker , DSW and Macy’s . There had been a plan to phase out wholesale clients since 2017, but with digital sales growing quickly, Donahoe said there was a need for urgency.

Executives were divided over whether Nike’s own stores, which include both factory outlets and specialty shops selling higher-priced new releases, could fill the sales void left by the retailers the company was cutting out.

In meetings, finance chief Matt Friend and Nike president Heidi O’Neill supported the aggressive exit from retail that Donahoe was pushing, while others favored a slower transition, people familiar with the matter said.

Some executives felt the specialty stores in particular worked better as marketing tools and that cutting off so many retailers so fast would backfire, the people said. Donahoe and his allies prevailed.

Nike teams were tasked to come up with a new global supply-chain process. Selling directly to consumers increased the company’s liabilities, including by shifting storage and shipping costs from wholesalers to Nike. The company would also absorb the losses from discounts if the merchandise didn’t sell quickly and inventory piled up.

One of the casualties of Donahoe’s 2020 transformation was a multibillion-dollar operation dedicated to developing footwear sold for under $100. The company deprioritised more-affordable footwear that usually sold to the sales partners that Nike was leaving behind. The move left Nike skewed toward higher-priced shoes.

The first evidence of cracks in Nike’s new approach appeared early last year when Foot Locker Chief Executive Mary Dillon said during an earnings call the brand had reversed course and was sending the retailer a wider assortment of Nike products. By the summer, Macy’s and DSW were saying the same thing.

The message was clear: Nike needed help selling merchandise.

Nike veterans said cutting off wholesale clients was one of the biggest mistakes the company has ever made. After digital sales hit the 30% of the total mark early in the pandemic, they dropped back, and haven’t reached that level since—let alone the 50% target Donahoe had foreseen.

Donahoe said in the interview the goal at the time was to lean more on specific partners, such as Dick’s Sporting Goods and JD Sports , which he considers to be more aligned with Nike, rather than make a dramatic shift in strategy. Nike deprioritised making lower-priced shoes because of supply-chain disruptions during the pandemic, but it is now making more of those products, he said.

“I don’t see it as a reversal of the strategy,” Donahoe said of the return to more retail chains. “I see it as an adjustment.”

Rising competition

Competitors have been using the sneaker giant’s playbook at its expense. Smaller brands like On, Hoka and New Balance have captured significant pieces of the market for both hard-core and everyday runners—and their popularity is spreading to the mainstream.

Often quoting Knight, the Nike co-founder, former employees said the principle always was to first capture the market for hard-core athletes with innovative performance gear, and the casual consumer would follow.

In early February, Hoka owner Deckers Outdoor tapped Nike alums to take over both the parent company and the shoe brand. Hoka had $1.4 billion in sales for the year through March 2023, compared with about $352 million three years earlier.

Hoka didn’t respond to requests for comment.

“When you’re the biggest, there’s always going to be people coming after you,” Donahoe said. Competitors give Nike an incentive to try to understand what consumers want and to figure out how to come up with something bold and different, he said.

Nike still dwarfs its competition . During Donahoe’s tenure, Nike sales have grown 31% to $51 billion in 2023. That is more than double the results of Adidas, its closest competitor by far. New Balance reported sales reached $6.5 billion last year, and upstart On almost hit the $2 billion mark.

The race to hit revenue targets came at a cost for Nike. Executives turned to the brand’s lucrative franchises, including Air Jordan and Dunk, and ramped up the releases. The strategy diluted the exclusivity prized by die-hard Nike sneaker shoppers.

Donahoe said in the interview that Nike ramped up production to meet demand on its SNKRS app, which fans use to buy the latest limited releases. In early 2021, Nike was meeting less than 5% of the demand for some releases on the app and consumers were frustrated, Donahoe said, adding the goal is to meet something closer to 20% of demand for the exclusive styles.

Now, sneaker resellers say they have seen release after release of Nike’s limited-edition kicks that don’t sell out on the SNKRS app, and that in the secondary market—a space that the brand closely monitors —prices are tanking.

Nike executives in March said they would pull back on franchise releases.

Donahoe said “franchise management has always been something Nike has done.”

Nike’s digital sales, a figure that includes direct and partner e-commerce sales, declined for the quarter ended Feb. 29. Friend, the finance chief, told analysts in March that Nike expects total sales to decline at least until the end of this year.

Struggle for innovation

The pursuit of sales growth from limited-edition sneaker releases led Nike to neglect its running category, long considered the core product of the company, former employees said.

This month in Paris, Nike unveiled its new product line for the Olympics, including running shoes with a new cushioning system that uses the company’s Air technology.

In interviews at the event, executives said the company had become somewhat risk-averse during the pandemic, when working remotely stifled creativity. Martin Lotti, chief design officer, said the company had spent too much time looking to its past.

“If you drive a car just by looking in the rear view mirror, that’s not a good thing,” Lotti said. “The bigger opportunity is the windshield.”

Current and former Nike executives believe the future of the company is in its app ecosystem , like the Nike Training and Running Club or its SNKRS app, and the data it can harness from them to help design and sell products. Inside the company, leaders have long tried to draw comparisons to Apple when talking about Nike’s innovation and design culture.

The sneaker giant has been acquiring smaller data analytics startups for at least a decade. Two years ago, it also bet on the NFT craze .

One of Nike’s biggest tech investments is a multibillion-dollar process to migrate multiple software programs into one single system. The new platform, known as S/4HANA, is still not operational and is three years behind schedule. The software is designed to help day-to-day operations, such as procurement and inventory management, and speed up digital sales.

As part of its accelerated focus on digital sales, Nike hired about 3,500 people to join what the company calls its global technology group, which includes consumer insights and data analytics. Executives at the time said they were investing in “demand sensing,” “insight gathering” and a new inventory system.

Former Nike employees with knowledge of the consumer insights strategy said executives misinterpreted the data in ways that overestimated demand for retro franchises.

During February’s round of layoffs executives trimmed layers of management across the company’s insights and analytics teams. A large technology innovation team, tasked with developing software to implement Apple’s new Vision Pro augmented reality system in day-to-day design tasks, and a separate artificial intelligence team were also eliminated.

Executives at Nike say it is entering a “supercycle” of innovation and that the new Air line of products enhances athlete performance.

At the Olympics preview event this month, the company took over the historic Palais Brongniart in central Paris with a three-day event to unveil its new Air line. Guests wandered through a museum-like, conveyor-belt installation highlighting Nike’s product evolutions and research and development programs. Athletes including runners Sha’Carri Richardson and Eliud Kipchoge modeled the new gear. Retired tennis great Serena Williams narrated the company’s lavish introduction video before appearing on stage.

Outside, 30-foot orange statues of Nike-sponsored athletes including LeBron James, Kylian Mbappé and Victor Wembanyama stood guard.

Donahoe’s relationship with Knight goes back to the early 1990s, when he was a Bain consultant on Nike projects. He joined the Nike board in 2014 and is one of the directors of an entity Knight created called Swoosh LLC, which holds roughly $22 billion worth of Nike shares and controls a majority of Nike’s board seats. Donahoe calls Knight his “greatest hero in business.”

The current CEO said he meets with his predecessor, Parker, every week.

Donahoe said that he and Parker share an approach to management he calls “servant leadership” that was embodied by some of his sports heroes, including basketball coaches Phil Jackson, John Thompson, Mike Krzyzewski and Tara VanDerveer.

“It’s never been about me. It’s about your players. And are you doing everything you can to allow your players to make the adjustments to win? And when you have a win it’s about the players and when you have a loss you say it’s on me, right?,” he said. “And that’s what I’ve always tried to embody, including during this period of time.”

This week, Donahoe is facing another test: the company is notifying several hundred more workers whose jobs are being cut.

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