A new fear takes hold in the market — missing out on the gains

Trader Talk

The markets have a new fear: FOMO.

In the past few days, as we have reached the heart of earnings season, the markets have again resumed their upward drift. In discussions with traders, there is a new fear on the Street. It is not fear of the government shutdown. It is not fear of a continuation of the tariff war. It is not fear of a China slowdown getting worse.

None of those concerns have disappeared. But there has been a new one added to the top of the list: Fear of missing out — FOMO — on the rally.

“Big money managers cannot get behind of their benchmarks,” Tim Anderson, managing director at TJM Investments, told CNBC. “Last year, with the S&P down 6 percent, a lot of big managers were down even more. Now, with the S&P 500 up almost 5 percent this month, you are risking clients saying, ‘Hey, you underperform in a down market last year, and now you underperform in an up market?’ They are saying, I cannot not buy if the market is going up.”

We have had good but not amazing earnings from key financials — Citigroup, Bank of America, J.P. Morgan and even BlackRock. Instead of selling on the news, investors have pushed bank stocks up an average 4 percent this week and 11 percent for the year.

“They finally found a reason to buy,” said Peter Tuchman, a NYSE floor trader with QMS Directex. “Those bank stocks were down 20 percent or more last quarter.” When earnings came in OK, investors picked up their buying. “They’re coming around with shopping lists and fresh cash.”

This is largely because expectations are much lower. The market steadily took down earnings expectations for 2019 beginning in the middle of the fourth quarter:

(S&P 500 earnings growth projections)

Oct. 1: up 8.1 percent

Jan. 1: up 5.3 percent

Jan. 15: up 3.1 percent

Source: Refinitiv

Another reason for the stability: The market is much cheaper. Even with a 10 percent rally in the S&P since the Dec. 24 bottom, the S&P 500 is trading at a forward price-to-earnings multiple of 15, at the cheaper end of the historic range. This is a big change from last year. At several times the S&P was trading at close to 18 times forward earnings, a historically rich multiple.

Declining volatility has also been a factor. The Cboe Volatility Index (VIX) hit 36 on Dec. 24, and has now dropped by half.

Marko Kolanovic, J.P. Morgan’s global quantitative and derivatives strategy head, has written often about the relationship between volatility and market liquidity. Liquidity, simply put, is the ability to buy or sell an asset without causing a significant change in price. Kolanovic and others have noted that when volatility rises dramatically liquidity usually decreases. The noticeable effect is that it takes less volume to move stock prices more.

Conversely, when volatility goes down, liquidity usually improves.

A rising market will also attract those using strategies that target momentum and volatility. These investors will buy automatically when volatility decreases. “One should keep in mind that if volatility stays low, inflows may result in the market drifting higher, which could in turn change investor sentiment and the whole market narrative,” Kolanovic said in a recent note to clients.

Finally, the fading of the great December bogeyman — a 2019 recession — has also calmed nerves.

“At the end of December, the only thing anyone was asking me was, ‘Are we going to get a recession in 2019?” Anderson said. “No one is asking me that now. They realize the numbers are not there.”

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