FOMO Is A Terrible Motivator

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

What a rug pull.

Yesterday was a wonderful day for most investors.  The S&P 500 (SPX) and NASDAQ 100 (NDX) indices rose just under 2% (interestingly, each was up 1.97% to be exact) after the Bank of England (BOE) intervened to support the UK Gilt market.  Never mind that the BOE’s move was borne largely out of desperation – they needed to stabilize their government debt because of a strategy that forced UK pension funds to post more collateral as gilts fell[i] – US equity investors cared only that a major central bank was pumping liquidity into the market. 

The rally proved to be another reminder of some themes that we have been repeating all year.  Expect volatilitySell the rips.  Sharp upward moves may just be “socially acceptable volatility.”  Parabolic moves, like those we saw in gilt yields, mean someone is in pain.  If the market is having trouble pricing relatively safe assets, it is very difficult to be confident about risk assetsSo it goes

I understand the enthusiasm, even though today’s drop has proven it to be misguided.  Major market bounces are often triggered by some type of central bank accommodation.  The BOE move staunched the bleeding in a key asset class.  It was not at all unreasonable for markets to view the BOE’s actions in a positive light. 

As the morning wore on, however, the BOE’s move was widely viewed more as first aid than curative.  With the third quarter ending tomorrow, it could have been disastrous for funds to post huge losses in a quarterly report.  In a less skittish market, a dose of palliative liquidity would have been a solid positive, not the trigger for an attempt at a major reversal.   But this is indeed a highly skittish market, and yesterday’s decently positive start turned into a momentum driven advance throughout the afternoon.  It is difficult to discern exactly why the early reaction to news morphed into an afternoon momentum-fest, but if I were to round up the usual suspects, FOMO would be at the top of my list.

FOMO, or “Fear Of Missing Out”, is a powerful motivator.  For better or worse, it makes sense for institutional investors.  Those who underperform their peers are in danger of having their investors move money to better performing funds, affecting their compensation.  But it makes little sense for individual investors to be guided by FOMO.  It’s just a manifestation of greed, envy or jealousy (take your pick).  At the risk of sounding like a scolding parent, you don’t have to jump into the market just because all your friends are. 

For better or worse, I’ve described stock traders as “liquidity junkies perpetually in search of their next fix”, and they got a fix yesterday.  Unfortunately the rush proved to be short-lived.  Traders and investors should do their best to remain sober and refrain from the lure of one-day raves.  There will indeed be valid reasons for lasting rallies, and those should be bought.  But a band-aid (or plaster, as they say in England) from one central bank is not one of them.

[i] It strikes me as eerily reminiscent of the 1987’s portfolio insurance.  The methodologies differ, but both involve selling assets into falling markets at a large scale.

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