Interactive Investor

Ignore FOMO feelings, investors urged as markets rebound

17th August 2022 13:10

Graeme Evans from interactive investor

Stock markets have rebounded after a dreadful first half of the year, but investors have been urged to curb their Fear of Missing Out (FOMO).

Investors are being urged not to chase this summer’s rally after a City bank noted the presence of FOMO (Fear of Missing Out) in the improved market sentiment.

The S&P 500 is up 17% from its mid-June low and the FTSE 100 index up 6% in the past month, fuelled by hopes of peak US inflation and a policy pivot by the Federal Reserve.

But UBS believes such talk is premature and that investors should consider a selective approach, with a focus on value stocks including those in global energy.

Mark Haefele, chief investment officer at UBS Wealth Management, said: “We expect renewed market volatility ahead, and we continue to recommend positioning portfolios for resilience under various scenarios.”

The latest improvement for US markets came after last week’s indications for a slowing in inflation after a flat month-over-month performance in July and the first fall in the producer price index since April 2020. Hopes of a soft landing for the US economy have been further helped by strong jobs data.

The S&P 500, which has risen for four weeks in a row for the first time since November, continued its advance on Tuesday by adding another 0.2%.

That was despite weaker-than-expected activity data from China offering a reminder of the uncertain growth outlook and the NAHB housing index signalling continued weakness.

Haefele noted: “Investor sentiment has gone from very poor with light positioning in June and July, to now talk of FOMO and a Goldilocks outcome.”

He said the past month’s rally has had a technical tailwind, consisting of short-covering, systematic strategies adding risk, corporate buybacks and positive retail fund flows. 

Haefele said: “There’s scope for this tailwind to continue supporting risk markets, as it appears that investors have been either eliminating hedges or starting from low levels of risk, more so than adding significant risk exposures.

“Improving sentiment over the last two months is a reminder that extreme pessimism is often a good counter-indicator. Bullish sentiment is less predictive of subsequent returns, but investors becoming more optimistic in the current highly uncertain environment does make the markets more vulnerable to negative news.”

Haefele believes it’s too early to assume that US recession risk is low, given that the Federal Reserve will want growth to slow to ensure that inflation returns to the 2% target.

And with the labour market still too tight, UBS thinks the rate tightening cycle will  continue even if the inflation data is favourable.

He added: “We expect the Fed to raise rates by at least 50 basis points at the next meeting on 21 September and think further hikes are likely through the remainder of the year.”

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