How FOMO Rules the Market
FOMO MOFO
FOMO – the Fear of Missing Out – seems to be really in play for the stock market these days.
I’d say it’s an oversimplification, and maybe a little mean-spirited to chalk FOMO up to jealousy.
Of course, we sometimes suffer pangs of envy when we see something that another person has that we’d like to have. A nice house, perfect family, a big position in Nvidia with a cost basis under $200…
But for this rally, I suggest that the FOMO is driven more by reason than base emotion.
Even an investing greenhorn could look at a 1-year chart for the S&P 500 and say, “Wow, stocks have gone up a lot.”
A few minutes of toggling the chart buttons to pull up a 5-year chart, and our greenhorn might say “Wow, stocks have never been this high before.”
Yes, the stock market is influenced by inflation, too. Prices rise when demand is ahead of supply. That’s exactly what we’re seeing in the AI space. Nvidia (NASDAQ: NVDA) is selling many of its best GPU processors that Taiwan Semi (NYSE: TSM) can make for $10k a pop – and its new chip announced this week will fetch $30K…
Intel (NASDAQ: INTC) is forking over $380 million each for AMSL’s (NASDAQ: ASML) newest lithography machines…
Social media site Reddit (NASDAQ: RDDT) just launched on its IPO day – its business plan is simple: open up its forums to AI companies to train their large language models and charge for the privilege. No word on how much this is worth, but it’s not nothing. And it’s a business model that didn’t exist a year ago.
The “expansion” arc of the business cycle always sees some inflation. Wages rise, energy consumption rises, CAPEX investment picks up, earnings increase, etc.
And, the expansion arc of the business cycle always seems to look more and more sustainable as it approaches its zenith. But, inevitably, the business cycle will eventually peak and recede, maybe even into recession.
So just as FOMO drives investors to continue to buy stocks as the cycle expands because they don’t want to miss out on the gains, investors also start to sell at perceived peaks of the business cycle because they’d just as soon miss out on the receding part. Reverse-FOMO, I guess.
This is one of the reasons they say you shouldn’t try to time the market, and we could say the same for the business cycle. It’s very hard to know exactly when a top is being made. And investors’ behavior ahead of this week’s Fed meeting is a really good example…
Fronting the Fed
Over the last month or so, we’ve seen a few inflation reports come in worse than expected. Some wonder why the Fed should cut rates at all when the business cycle is arcing higher…
It makes sense that some investors would sell some stock ahead of the Fed’s policy announcement that was delivered on Wednesday, March 20.
In fact, Bank of America said that the week before the last Fed meeting saw the highest outflows from stocks since December of 2022:
I won’t fault anybody who bet the Fed might back off on its rate-cut promise and focus a little more on the recent inflation data…
Even though that bet was wrong.
Last Wednesday, one source described Fed Chair Powell as “giddy” as he reiterated his promise to deliver three rate cuts this year. Plus, on the same day, Micron Technologies (NYSE: MU) delivered a very bullish earnings report and forecast, which should bolster the case that the AI business cycle arc has not peaked.
Whoopsie!
Everybody back in the pool!
Double Reverse FOMO
The switch flipped back to bullish, money flooded back in and the S&P 500 closed at record highs three days in a row.
Now, about that note from Bank of America, about how the market hadn’t seen so much money come out of stocks since December 2022…
Do you know what else happened in December 2022? While the strategist-types were busy typing up their Recession 2023 Predictions, the S&P 500 hit a low of 3,764 right before Christmas and it never looked back. Money pulled at the bottom had to be reallocated at higher prices.
I’m pleased to report that during that same week, on December 19, I told Pro Trader Today readers to buy Amazon at $87 a share.
FOMO indeed.
A big reason that the Fed’s rate cut forecast is bullish is because $6-7 trillion dollars is sitting in money-market funds right now. With rates where they are, that money is earnings as much as 5%.
But three rate cuts this year, with more to come in 2025 will put a crimp in that easy profit. And maybe, just maybe, some of that money might go looking for a better return in…oh, I don’t know….the stock market?
Wouldn’t wanna miss out on a few hundred billion coming into the stock market, now would ya…
Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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