Crossing to The Other Side of FOMO

March 2, 2020 | by V. Henry Astarjian | Posted in Blog

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The stock market’s dramatic declines in recent days have come as a shock to some who as recently as two weeks ago had been expressing their FOMO, or fear of missing out on the market’s sharp increases that started late last year.

The declines of the past few days have been accompanied by a volume of commentary from the media and from our nation’s capital expressing surprise and uncertainty. My observation is that beyond the immediate shock that these people have expressed at the breathtaking nature of the market’s declines since late February, they have offered little in the way of guidance for the future to anxious investors. Maybe they need time to think things through.

For the past two years I have been reporting to clients that uncertainty pervades the corporate world. Even before the current coronavirus scare, tariffs, trade wars, Brexit, the inverted yield curve, and high stock market valuations, among others, have been of concern to both corporate CEOs and to some investors, including myself.

CEOs have had an especially difficult task of deploying capital into new plant and equipment and into new ventures as the unpredictable nature of the tariffs and trade wars has left them pondering the right course of action. Brexit has also added to this uncertainty, with its unknown consequences and shifting timelines. As a result, we have seen a drop in capital spending among U.S. companies, and a corresponding corporate earnings recession.

Most investors on the other hand, have been focusing on the one bright spot in the economy, the American consumer. In general, investors have concentrated their resources mostly on the FAANGs (Facebook, Apple, Amazon, Netflix, Google) to provide them with returns, as these are now the quintessential consumer stocks and have been faring well. This focus has led to the sharp rise in the major stock market averages such as the Dow Jones Industrial Average and the S&P 500 that we have seen from late 2019 until just a few days ago. But not all has been well in the stock market below the level of the FAANGs. 

The transportation sector, as measured by the Dow Jones Transportation Average, has been in a rut, reflecting the realities on the ground for transportation companies across the country that are contending with slowing demand from their business customers and reduced imports from China. The trucking industry has been especially hard hit. And small cap stocks have been signaling weakness in the economy for some time, even as the FAANGs have soared. 

There has clearly been a disconnect between fundamental economic and business realities on the one hand, and the over-optimism and overvaluation engendered by the FAANGs on the other.

I have been sounding the overvaluation alarm for the better part of 2018 and 2019. Having invested through a number of market cycles, I know that overvaluation can be a danger if a “black swan”, an unpredictable negative event,  such as the outbreak of the coronavirus, appears. It can have a serious effect on share prices. Investors who buy into highly valued markets believe that all is well and that all will be well into the future. This is a sentiment that can easily be broken if an unforeseen negative shock materializes.

For this reason, I have been a fan of higher-than-usual cash levels. Cash does not provide great returns over time, but it does provide us with the opportunity to buy more reasonably valued investments down the road. 

Having said all this, let me briefly tell you what I think we could expect in the future. 

First, I do believe that despite all the drama unfolding before us now, the long-term 2009 bull market is likely still intact. Interest rates are low and perhaps heading lower; the IMF’s global economic growth estimates call for about 3% growth – that’s a very healthy growth rate and American companies can benefit; the American economy is still growing thanks to consumer spending; and equity valuations are coming down with each drop in the stock market averages. More reasonable valuations means that investor expectations are becoming more realistic. When we have 2% GDP growth in the general economy and 30% growth in equities as we had last year, there is a basic rift between reality and the stock market. Lower valuations “right size” those expectations and allow the bull market to resume. 

Second, we should expect quite a bit of up/down volatility in the stock market over the coming weeks as buyers and sellers engage in their normal tug of war and the market seeks some balance.

And third, as valuations become more attractive, deploying cash into stocks will make more sense, provided the economic and fundamental backdrops to the equity markets are favorable.

Prognostications are always subject to new developments, but my sense is that with the recent market drops, stocks may be nearing the end of the 2018 correction and preparing to resume the 2009 bull market in due course. 

In the meantime, we are witnessing the other side of FOMO.