Afraid of having missed the bottom of the stock market? History says to curb your FOMO.
Fear of missing something, or FOMO, may help boost stock market gains as major indices rebound from 2022 lows set in mid-June – but investor anxiety about potentially missing out “bottom” is generally misplaced, said a strategist on Tuesday Note.
“A lot of investors insist on buying early so they ‘can be there at the bottom.’ Yet history suggests it’s better to be late than early,” wrote Dan Suzuki, deputy chief investment officer at Richard Bernstein. Associates.
The S&P 500 SPX,
remains in a bear market but has rebounded more than 17% from its June 16 close at 3666.77, leaving it just over 10% below its January 3 high at 4796.56. The large-cap benchmark has posted four straight weekly gains and ended Tuesday at its highest level since late April as it tried to overcome resistance at its 200-day moving average near 4,326.
See: This stock market milestone indicates the S&P 500 could be up to 16% higher within a year
The broader rally, which saw the Nasdaq Composite COMP,
break out of bearish territory and the Dow Jones Industrial Average DJIA,
cutting its year-to-date loss to less than 7% seemed to attract some investors scrambling to catch up.
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“Investor sentiment has gone from very weak in June and July, with investor positioning also light, to now talking about FOMO and a Goldilocks result,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management, in a note earlier this week.
While the uptrend is less of a contrary indicator and more of bearish sentiment, Draho warned that investors “becoming more bullish in the current highly uncertain environment makes markets more vulnerable to negative news.”
That mid-June marked the bottom will only be clear with hindsight. RBA’s Suzuki said an analysis of performance around past bear market lows shows that being fully in the market at the bottom is not as important as many investors might think.
In an update to our previously published analysis, we analyzed returns for the full 18-month period encompassing the six months before and 12 months after each market low. We then compared the hypothetical returns of an investor who held 100% stocks for the entire period (“6 months ago”) with one who held 100% cash up to six months after the market bottom, then moved to 100% equity (“6 months ago”). late”).
The chart below reflects the results, which showed that in seven of the last ten bear markets, it was better to be late than early.
“Not only does this tend to improve returns while significantly reducing downside potential, but this approach also gives extra time to assess incoming fundamental data. Because if it’s not based on fundamentals, it’s not only guesswork,” Suzuki wrote.
What about exceptions?
Suzuki noted that the only times in the past 70 years when it had been better to be early occurred in 1982, 1990 and 2020. “But in each of those cases, the Fed had already cut interest rates “, did he declare. “Given the high likelihood that the Fed will continue to tighten as earnings growth is already slowing, it seems premature to significantly increase equity exposure today.”