By Lewis Krauskopf and Sinéad Carew

NEW YORK, (Reuters) – Buying stocks in pullbacks is a popular strategy for investors. However, Wall Street strategists warn that there are many risks associated with investing after a recent tumble.

Ryan Detrick (NASDAQ: Chief market strategist, LPL Financial) stated that the index has seen 25 pullbacks totalling at least 5 percent since 2012. The index’s gains have been more than 240% over that period, which makes it easier for investors to intervene during periods of weakness.

Already dip buying is evident. The S&P 500 bounced back over 1% after Monday, when a sharp sell-off saw the S&P 500 end more than 5% below its closing record high, in its biggest drawdown so far in 2021. According to Vanda (NASDAQ Research), retail investors were the buyers. They have been buying an average of $1.2 BILLION in stocks each day this week. That’s more than their usual.

Some worry, however, that buying the latest dip may come with more near-term risks than before as investors face a bevy of headwinds, from the looming unwind of the Federal Reserve’s $120 billion a month government bond-buying program to a protracted battle among lawmakers to raise the U.S. debt ceiling.

Analysts at BofA Global Research on Tuesday cautioned that “the coast appears far from clear” as the Fed prepares to wind down the easy money policies that had helped the market double from last year’s lows as early as August. BofA’s target on the S&P 500 is 4,250, some 2% below Tuesday’s close.

Analysts were also worried about the risks associated with a Fed that is more hawkish. Morgan Stanley (NYSE:), who on Monday said the S&P 500 could fall as much as 20% if the economy and earnings “cool off” as the Fed tightens.

Shawn Snyder, head of investment strategy at Citi US Wealth Management, said a nasty fight among U.S. lawmakers to raise the country’s debt ceiling or throw the nation into default is currently the key near-term risk equities face.

Snyder stated that “buy-the-dip” still works, but that there are specific issues that must be addressed first.

Other risks that analysts are concerned about include a recent rise in energy prices and concerns over China Evergrande Group, a heavily indebted property developer. The S&P 500 is up 15.7% so far this year.

JJ Kinahan from TD Ameritrade Chicago, said that buying the dip “certainly has worked for people in the past 10 years.” But, things eventually stop working, particularly if people keep doing them for so long.

One scenario outlined by Morgan Stanley’s strategists sees the S&P 500 falling by about 10% as the Fed tightens monetary policy due to rising inflationary pressures. The Fed tightening its monetary policy leads to earnings and the economy slowing, which could lead to a 20% slump.

Morgan Stanley analysts stated, “Bottom Line: Faster tapering with greater growth deceleration implies a higher than 10% correction.”

These worries aside, the historical record shows that strong momentum markets tend to rise despite these concerns. The S&P 500 has notched a positive fourth quarter nearly 80% of the time in years during which it has climbed more than 12.5% in the first nine months, according to LPL’s Detrick, delivering a median fourth-quarter gain of 5.2%.

You might also find seasonal trends that could be a reason to purchase sooner than you think. While September lived up to its historical reputation of being the weakest month with a 4.8% decline, October is traditionally stronger, with the seventh-highest average gains for the S&P 500 since 1950, according to the Stock Trader’s Almanac.

The almanac places November second on the list for month performance. On average the index rose 1.7% while December was third and equities rose 1.5%.

Goldman Sachs (NYSE 🙂 is one of the banks pushing for greater gains. The bank’s strategist earlier this week issued a note with a year-end target of 4,700 for the S&P 500, about 8% above where the index closed on Tuesday.