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FOMO, the Fear Of Missing Out

Weekly Commentary, 7/11/16 – 7/15/16

FOMO is an acronym making its way around Wall Street as U.S. equites continue to set new record highs. FOMO stands for the “Fear Of Missing Out” on future returns. FOMO is closely associated with greed.          

Two of the most powerful emotions driving investor returns are often classified as fear and greed. Investment decision makers are prone to the potential pitfalls that psychologists have spent years documenting in the study of behavioral finance.  In the cycle of investing, fear takes over when stocks suffer large losses for a sustained period. As a result, investors may become more fearful of sustaining further losses and wind up selling near the market low, abandoning a long term investment plan. Greed (FOMO) is at the opposite end of the investment cycle. Near market tops, after extended periods of gains, investors may begin to get euphoric and believe prices can only go higher (forgetting the emotions of fear) and hope to acquire as much wealth as possible in the shortest amount of time.  Investors could then wind up buying near the market highs. 

Giving into these emotions can have disastrous effects on investor portfolios resulting in the “behavior gap”.  Dalbar, a financial research firm, conducts an annual study of investor returns. In 2015, the average equity mutual fund investor underperformed the S&P 500 Index by a margin of 3.66%. The 20-year annualized S&P 500 Index return was 8.19% while the 20-year annualized return for the average mutual fund investor was 4.67%, a gap of 3.52%. The balance between the market returns and investor returns is called the “behavior gap” (selling at the lows and buying at the highs).   

Despite another horrific terrorist attack, the major U.S. equity markets experienced their third consecutive weekly gain and sit at, or near, record levels. The Dow Jones Index posted a gain of 2.04%.  The S&P 500 Index tacked on another 1.49%, and the Russell 2000 Index led the major indexes for the second week in a row gaining 2.37%. The U.S. wasn’t the only country rallying. The STOXX Europe 600 gained 3.23% after the Bank of England held rates steady but hinted it would launch fresh stimulus in August. The STOXX is up now over 9% from the post BREXIT lows. The Nikkei 225 rocketed ahead over 7%, and the Shanghai Composite added over 2%.

The panic that gripped the markets following the BREXIT has mostly subsided. Volatility as measured by the VIX has fallen from 26 to 12.50 in thirteen trading days. Anxiety over the July 27 Federal Open Market Committee (FOMC) statement  and stronger U.S. economic data helped drive the yield on the U.S. Treasury note from 1.38% to 1.58%.  Fixed income investors are still somewhat comfortable that international bonds will serve to keep a lid on interest rates in the U.S.

The market technicals remain strong and continue to improve.  Advancing S&P 500 stocks topped declining stocks by almost 3-1. 130 stocks set new highs versus 1 new low. According to Lipper, in the seven days to July 13, investors added a net $7.8 billion into U.S. equity funds. It was the first weekly inflow since late April.  

The market has rallied 8% from the most recent lows of June 27 and is considered by some as overbought. A period of consolidation would not be surprising as we head deeper into earnings reporting season and the July 27 FOMC meeting. 

At Stadion we realize we can’t control the markets or returns, but we can control our emotions by following our well defined and disciplined investment processes. We don’t know if this is a short term FOMO rally, soon to be reversed, or the initial stages of the next leg of the current bull market. Our rules based processes are designed to help us avoid the behavioral biases that investors can face in the investment decision making process.    

The Stadion Managed Accounts risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets (the remaining 40-60% of each portfolio), Stadion uses a proprietary, rules-based weight-of-the-evidence model. The portfolios are overweight their respective benchmark equity allocation at this time.    

 


Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The EURO STOXX 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. The Nikkei 225 is a price-weighted stock market index for the Tokyo Stock Exchange and is the most widely quoted average of Japanese equities. The Shanghai Stock Exchange Composite (SHCOMP) Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.

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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.