Stocks still have not reached the point of capitulation
Lord knows we’ve been through enough acronyms in this market cycle.
FOMO – the fear of missing out, has driven many investors, both professionals and amateurs, towards spicy asset classes. Nobody wanted to be the last person to jump into the next big deal as excess money poured into the global financial system.
TINA – There is no alternative – went one step further. This encapsulated the idea that fund managers had no choice but to buy risky stocks because boring old bonds yielded so little or cost money to hold even before inflation set in. into account. It’s “the market made me buy this garbage”, but with a slightly more absurd name.
But it looks like we haven’t reached the top of the acronym yet. With bond yields now much higher, TINA is no longer (RIP) and the market mood has reversed. “We’ve gone from fear of missing out to fear of holding on,” as Peter Tchir, head of macro strategy at Academy Securities, said this week. For my sins, I read a lot of research from banks and investors. But “from FOMO to FOHO” is new to me.
Tchir here refers to the dreaded bitcoin — an “asset” for lack of a better word that ripens like a good glass of whole milk on a summer’s day. If you managed to avoid this week’s crypto drama (kudos), then what you need to know is that its price crash has morphed from the price-declining stage that started in November to ‘to the point where they are dropping double digit percent daily and the platforms that offer to trade them are starting to crash and are struggling to return money to people who have played on the coins.
One platform, Bybit, offers products from “risk-averse traders” which it describes as “low-risk savings” up to “999% annualized interest”. Terms and conditions of application. It’s not a typo but it’s a sign that all is well in this very serious market which is not at all desperate for fresh money, honestly.
The next step is where you start to wonder if a large-scale price crash will affect other markets (the jury is out on that one) and the ripple effects when venture capital, private equity or even the generally stuffy pension fund investors who backed, these intermediaries begin to bear losses. It’s gonna be fun. But I digress.
The thing is, crypto has finally demonstrated a useful function.
Change to buy, you know, stuff? No. Store of value ? Not really. Hedge against inflation? Definitely not. But as the most speculative asset on the planet, perhaps even the most speculative of all time, it looks like a handy warning of calamities to come. The crypto canary in the coal mine. The big question is whether the haunting crypto FOHO will start to plague stocks.
We don’t feel like we’re there yet. Yes, stock markets have suffered so far in 2022. This year is shaping up to be a real stench for stocks. The S&P 500 index is in a bear market, down more than 20% from its recent high and even the FTSE 100, generally conflict-free thanks to its heavy commodity weighting, is down more than 4% this year.
Buying the dip remains an extreme sport. “US stocks have suffered the biggest year-to-date losses since at least the 1960s,” as the BlackRock Investment Institute pointed out this week. “It sparked calls to ‘buy the dip’. We pass, for now. Profit margins are threatened by energy and labor costs, valuations haven’t come down enough and the US Federal Reserve could tighten policy too much for its liking, BlackRock said. After raising the benchmark rate by a historic three-quarters of a percentage point this week, the Fed itself acknowledged that slamming the brakes would inflict “some pain.”
But while few are brave enough to complete stock allocations at a (relatively) cheap price, many seem unwilling to really give up just yet.
Jeroen Blokland, formerly of Robeco Asset Management and now head of research house True Insights, points out that the S&P fell almost 4% on a particularly ugly day earlier this week. It’s a lot. But he says this is only the 39th worst one-day drop since 2005. His sentiment indicator is still in neutral territory, not yet in the fear zone. His conclusion: no capitulation.
A banker shared a curiosity with me this week: when you ask investors if they are unhappy and terrified, as Bank of America frequently does in its monthly survey, they say yes. “Sentiment on Wall St is dire,” the bank observed this week. But when you ask about their holdings, most haven’t thrown away their favorite riskiest assets. “People are going to have to start selling the things they really like,” the banker says. “There is still a surrender to come.”
Nerves show. “I’ve never had such good access to CIOs and CEOs,” he says. “They want to talk.”
This suggests that investors are desperately looking for ideas and ideas on what might happen next and, exceptionally, what their peers are doing. If FOHO hits stocks, no one wants to be the last out.