Market insights
Every now and then, we all have that feeling of missing out. FOMO, or ‘fear of missing out’ was first identified in the late 1990s and grew in importance exponentially with the surge of social media and its impact on our daily lives. So prevalent is FOMO, that it has even been added to the Oxford dictionary. Really! Nowadays, it is almost impossible to go 24 hours without receiving notifications on our mobile phones about our friends’ and families’ exciting activities. FOMO has become a norm in our connected society and it shows when we text while driving, keep our phones on the table during our meals and unceasingly check our Twitter and Facebook feeds, just because something remotely interesting might be happening to someone, somewhere.
This anxiety is not limited to our social interactions but is also one of the driving forces behind many investment decisions. This is especially the case when markets experience strong and persistent gains, such as we are seeing now. Current positive conditions (with global equities up more than 15% this year until the end of April) have encouraged many investors, who were not expecting such a strong performance, to rethink their strategy and buy, at what is considered to be a market peak, in order not to lose the hypothetical next leg up. The impact of chasing the wave, rather than planning for it, can be negative and drastic, with considerable wealth destruction in the long-term in some cases.
Before I delve further into the complexities of the human mind and its impact on investments, let’s have a look at what happened in the markets in April:
- Developed market equities had another strong month and maintained their positive momentum of the first quarter. Equities reached record highs in the US, supported by: better-than-forecast US company earnings; stronger than expected economic growth in the US and Europe; and indications that the US and China were close to reaching a trade agreement. The S&P500 gained 3.93% in the United States and the STOXX Europe 600 gained 3.23%, while in Japan, the Nikkei 225 jumped by 4.97% - a result of continued support from the Bank of Japan (which announced interest rates would remain unchanged until at least 2020), as well due to the positive news from the US-China trade negotiations.
- Fixed income markets had a month of mixed results, with losses in safe havens and gains in credit, in the US and Europe. Credit was bolstered by central banks pivoting towards more accommodative monetary policies, which increased the appeal of riskier assets. US Treasuries lost 0.27%, while US investment grade bonds gained 0.54% and US high yield bonds ended the month up 1.42%. In Europe, sovereign bonds lost 0.04%, while investment grade bonds gained 0.72% and European high yield bonds gained 1.32%.
- Emerging markets had another positive month, supported by good news related to US-China trade relations and the persistent risk-on sentiment in the markets. EM equities gained 2.00%, and EM bonds gained 0.40%.
- Oil had another strong month on the back of a very strong first quarter, gaining 6.27%. As seen in previous months, the market was supported by lower output from OPEC countries and Russia. In addition, this month prices were impacted by the US’s decision to begin removing all sanction waivers for nations allowed to import Iranian oil.
- Gold had yet another negative month, losing 0.68%, as a result of the strong US dollar and the accommodating environment for risk. News that Venezuela sold $400 million of its gold reserves during the month also helped keep prices under pressure. Unless there is a catalyst in the short-term, prices are likely to remain depressed for now.
Global markets in numbers
Market Outlook and V3´s position
Looking back at the markets’ performance in 2019, it is easy to see why investors, who are underinvested or holding too much cash, are kicking themselves and asking why they did not take advantage of this market rally. More than that, they are looking at how they can ensure they will not miss out on the next one. Unfortunately they might be waiting for some time, as there are not a lot of reasons for another rally to materialise in the near future.
‘Fear of missing out’ is one of the reasons why a long-term buy-and-hold strategy can be difficult to implement - or any long-term strategy for that matter. When strong market moves happen, many investors start questioning their decisions. This can manifest itself in individuals playing catch-up by chasing the market. The problem with this approach is that anticipating market moves is not only extremely difficult to achieve with accuracy, but it usually ends up with investors buying high and selling low (the opposite of what they aimed for when they decided to time the markets), effectively destroying wealth.Over time, this can mean the difference between a prosperous future and bankruptcy, especially when followed by leveraged attempts to recover losses on previous trades.
That is one of the reasons why we can keep our overall asset allocation unchanged for long periods of time. We put in place tactical, opportunistic trades when we are faced with long-term potential game changers, such as a no trade deal between the US and China in the coming months, or a fundamental change in the economic outlook. Although we agree that a decent timed investment strategy can generate extra returns for a portfolio, the fact that we would need to anticipate the future means that execution risks are bigger than the potential gains.
That is not to say that we do not actively manage our portfolios – in fact, we are currently closely monitoring a potential trade level in US equities. With the S&P500 close to 3’000 points at the end of the month, we believed that a robust positive reaction to an eventual trade deal between the US and China should have been used as an opportunity to trim the allocation to this asset class at an interesting price level. On the flip side, we are now keen to increase our US equities allocation should a) prices fall strongly following the announcement on May 10th that additional tariffs would be put into place and b) we do not identify any cracks in long-term pillars of a future market recovery. This is our own version of FOMO: the Fundamental Observed Market Opportunity.
For more information, please contact our Chief Investment Officer, Cássio H. Valdujo, on:
+41 22 715 0910
cassio.valdujo@v3cap.com
Cover image: https://www.shutterstock.com/image-photo/business-man-running-behind-plane-194076341