In a recent BARRON’S, it was reported that the American Psychiatric Association recognizes more than 100 different types of phobias. But what’s causing widespread anxiety in the markets now is one that might not make that list of fears. That would be “The Fear of Missing Out.”
While the Standard & Poor’s 500 index was mostly flat since March 1, its recent breakout to 2500 has energized those looking to the next peak. Anyone for 2600? 3000? Yet the advance hasn’t been very even handed. Large company growth stocks are up 5.5% in the 2nd Quarter while their value cousins have gained just 1.9%. With the S&P 500 funds up 3% with 20+ records along the way, we do notice that 40% of the stocks still rest below their 50-day averages.
So investors are flocking to big recent winners. The Nasdaq Internet Index — whose components run the gamut from Netflix (ticker: NFLX) to Etsy (ETSY) to Lands’ End (LE) — has bumped up 27% this year and trades at an eye-watering 62 times what its companies have earned. And then there’s Bitcoin, which gained 37% from January to April. Then it went parabolic with a 75% spurt in May.
Today, tech stocks make up about 23% of the S&P 500, well above the historical average of 15%. That’s still fairly innocuous compared with a 34% weighting at the tech-bubble peak in 2000. No, we’re not in a similar bubble, and some big tech stocks do offer liquidity and profit growth which are exactly the traits that investors crave this far along in an economic cycle. But it is an increasingly crowded ship onto which people are hastily climbing aboard. Maybe we’ve seen this movie before…
In a rising market, “fear of missing out” also bothers investment and fund managers because clients get antsy for better returns – like now. Yet as diversified investors, we know that even if we happen to own whatever that best performing investment is, it’s sure to be just a piece of our portfolio. Best case then is that we’ll only get a piece of that return. In order to capture all that upside, we would have to wager everything into that single investment. We don’t do that because that strategy will also position one day guarantee that will absorb all of the downside.
Speaking of upside and downside, we saw a study from Chris Bilello in Research at Pension Partners which mentioned that since 1928, the S&P 500 index has generated total returns of 9.3% annualized. What is less widely appreciated is that a less aggressive portfolio which captures only 63% of the upside in rallies can still outperform the S&P 500 index by limiting downside exposure to just 31% in selloffs. Over decades going back to 1928, such a portfolio would have generated annualized returns of 12.9%. So, is there a catch?
Well, that strategy would have underperformed the S&P 500 over the last three years. In a lengthening bull market with no meaningful corrections, limiting the upside to just 63% has become seriously unpalatable. Quoting Bilello, “The tide always turns, and while out of favor today, preserving capital and managing risk will be back in vogue again but only after the declines occur.”
Quoting BARRON’S Kopin Tan, “Stop me if you’ve heard this before, but it now seems there’s nothing to fear but fear itself.”