Ignore the FOMO and Proceed with Caution

December 6, 2019 | by V. Henry Astarjian | Posted in Blog

The stock market has been hitting new highs of late, prompting many equity investors to worry about “FOMO”, or fear of missing out. FOMO is almost a primal instinct in us humans and stems from our sense that we may be missing out on something good, while others are jumping in and having all the fun! For investors it’s a perfectly legitimate sentiment when the market is coming out of a long correction or out of a prolonged bear phase and the prospects for corporate earnings and economic growth are improving. When the future looks brighter than the present, we don’t want to miss out on all the potential profits!

Yet, we know with the recently inverted Treasury yield curve that bond investors don’t think the future is all that rosy, and do seem to think that a recession is a distinct possibility in the months ahead. That makes FOMO a little premature, leaving us to ask who is right, enthusiastic stock traders or cautious bond investors? 

The answer may be both, but for different timeframes. Let’s focus on the near-term for now.

The economy is currently slowing, with GDP growth decelerating below the 2% range and corporate earnings declining by -1.4% in the coming months. But these are not real surprises and are already figured into the markets. 

So what else could be the trigger for stock market turbulence ahead, by which I mean a significant decline in the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite as we saw in December of 2018?

Three factors stand out in my mind as distinct possibilities. 

First, there may ultimately not be a good China deal, by which I mean a deal that’s good for the United States, or there may be no deal at all. Either prospect could leave American businesses in a kind of limbo where they don’t know if they should move ahead and do business with the world’s most populous nation and second largest economy, or if they should look for growth somewhere else in the world. China is a huge source of potential growth for American firms and finding alternate geographical growth drivers may chew up corporate resources as companies look for multiple alternatives to compensate for the loss of one enormous country.

Second, the political climate in the U.S. is increasingly injecting uncertainty into the markets, and as we know, the markets hate uncertainty. What will impeachment bring? Who will be our next president? What policies will drive the next administration in Washington? We are at a major inflection point in the politics of this country and that cannot be ignored as a driving force for the stock market. 

And third, high stock market valuations are a bleak backdrop for the other two factors, meaning that investors can easily be spooked into selling if their current expectations for a good China deal, reasonable economic growth, and stable government policies in Washington don’t materialize. 

So what’s an investor to do? 

I think the wisest answer is, wait! 

A number of years ago, Donald Sull, a lecturer at the MIT Sloan School of Management, published an article in the Harvard Business Review in which he spoke of the great value inherent in “active waiting”. He viewed waiting as a strategy that can be profitable in the long-run. Active waiting entails five components, 1) keeping your priorities clear, 2) exploring potential opportunities and threats in the future, 3) keeping a war chest of cash for future use, 4) honing your skills and your processes while you wait, and 5) declaring the main effort, by which he meant re-focusing on your main purpose and not losing sight of your goal. 

As a professional investment manager, active waiting is the hardest thing I’m called to do for my clients. Waiting for more favorable conditions to materialize that would allow me to purchase stocks for clients at reasonable valuations that are unencumbered by the market’s lofty and unrealistic expectations is a challenging task. Yet, waiting can make the difference between buying a stock at a price and valuation that allows for a healthy profit in the future, or buying a stock that stays in a rut for months or years and that ultimately disappoints. 

With the prospect of market turbulence increasing by the week, it’s all the more imperative to disregard the FOMO mindset and instead to proceed with caution.

-V. Henry Astarjian

Disclosures

Waterstone Advisors LLC is a Massachusetts registered investment advisor with clients in Massachusetts, New Hampshire, Connecticut, and California. Registration with securities authorities does not imply a certain level of skill or training. Investment results are not guaranteed. The value of accounts can decrease. Past performance is not indicative of future results. For additional information and disclosures, please see our ADV Part 2 (the “Firm Brochure”) in the Our Approach page of our website, www.waterstoneadvisorsllc.com , or contact us at 978-828-2188.