Fear of hanging on and Quasimodo’s dream

Acronyms abound in money. ASX, S&P, FAANGs, BRICs, RBA are so of the better known, but pretty old hat, ones I’m sure you are familiar with.

More fashionable have been TINA (There is No Alternative) and FOMO (Fear of Missing Out) which have been the dominant emotional drivers for a lot of investment thinking in the past couple years of easy money and sugar hits, courtesy of central banks.

Cheap money made it easy for lots of investors to look clever and smart, but the surge in inflation, rising interest rates and growing fear and loathing in markets, is exposing that simplistic idea that investment is easy.

As Warren Buffett once colourfully put it “Only when the tide goes out do you discover who’s been swimming naked.”

There have been a lot of hastily-reclothed investors since May when nervousness about rising interest rates hit equities and crypto at roughly the same time, and returned a month later to administer an even bigger shock to the system.

And despite a more comfortable tone this week – more a bear market relief rally than anything more substantial – FOHO – Fear of Holding On – still stalks investor thinking.

It continues to drive momentum in the stricken crypto world and among equities perceived as being exposed to higher inflation, rates and a recession – sort of like the entire market, if you think about it.

Real world analysts have been quick to grab the acronym to describe some of the selling we see when the risk is well and truly front of everyone’s thinking.

For investors in equities, FOHO is the final step before capitulation – we saw that idea paraded off and on over the past fortnight as market measures fell, bounced and fell again.

Investors have their favourite stocks and FOHO emerges when a big selloff happens – as we have seen in parts of May and this month.

Tech stocks especially have been hit by FOHO – Netflix, Apple (lately), Amazon, Alphabet, Microsoft’s, Mets (née Facebook), Snap, Twitter, even Tesla (for various reasons) have fallen victim to it.

Out go those stocks managers and individual investors real like and see as core holdings – no one wants to be caught holding duds, even if there is no evidence they are duds – just that they could be.

it’s just that rotation and momentum turn the thoughtful into lemmings – we saw that in the February-March, 2020 sell-off in the first wave of the pandemic.

The rapid rebound from the lows around March 23, 2020 was really managers and other investors realising their FOHO was silly, regaining their nerve and reclaiming their favourites – who happened to be FAANGS and fellow travellers like Microsoft, with the assistance of low interest rates and hundreds of billions of government and central bank money.

…………

Now it’s all about finding out if markets are close to the bottom and listening for that bell to be rung to tell those listening that it is OK to go back into the water.

But no one hears the bell until afterwards. As the adage from central banking we mentioned last week says, central banks are only one rate rise away from a recession – and that is only apparent after the event.

That said, you could easily make the case that the 0.75% hike from the Fed this month was a bell being rung. It was such a defining moment.

So that begs the question, if that was the bell, what lies ahead – rebound, stagflation or outright recession?

The latter is feared and the former is for dreamers. It’s the middle choice that seems to be still top of most forecasts looking out into the rest of 2022 and early 2023.

The latest Bank of America global investor survey shows big investors have heard the bottom approaching with 73% of respondents expecting a weaker economy in the next 12 months, the lowest since the survey started in 1994.

The survey showed that 72% of investors think global profits will worsen over the next 12 months, up 6 percentage points from May and the most since September 2008 during the global financial crisis.

The survey revealed that Investors are telling companies to “play it safe” with 44% wanting businesses to strengthen their balance sheets, up 3 percentage points from May and the highest since January 2021, rather than increase spending on capital expenditure or deliver share buybacks.

The survey results came out before the S&P 500 collapsed into a bear market in the wake of the Fed’s 0.75% rate hike.

The 73% figure would have been larger as would the 72% figure in the survey, had it taken into account the blow to confidence from the 0.75% rise in the Federal Funds Rate and the Fed chair’s comments after the decision.

Fears of stagflation are at the highest since the 2008 GFC while global growth optimism has sunk to a record low, according to the BofA fund manager survey.

Global profit expectations also dropped to 2008 levels, with BofA strategists noting that prior lows in earnings expectations occurred during other major Wall Street crises, such as the Lehman Brothers bankruptcy in 2008 and the bursting of the dotcom bubble in 2001.

Unlike those crises, this time it is roaring inflation that is the catalyst and that is much harder to adjust to. Those other crises were instinctively met by rate cuts and monetary policy easing a from the Fed.

This time it is different because the Fed is meeting this crisis with rate rises (and big ones) and a tightening via running down the size of its huge balance sheet.

With that sort of background, you’d expect investors are throwing everything overboard and rushing to cash.

In terms of positioning, the BofA survey showed investors are long cash, US dollar, commodities, healthcare, resources, high quality and value stocks, while short positioning dominates bonds, European and emerging-market stocks, tech and consumer shares.

And it seems that oil is the new favourite and perhaps at some stage, a prime candidate for a burst of FOHO if the Saudis lift production (after Biden’s trip in July) or demand sags as economies slow.

The BofA Survey found that 67% of respondents believe oil will produce the best returns this year.

That’s up from 56% of investors who thought the same in May.

Michael Hartnett, global strategist at BofA who leads the survey, wrote that this leaves “no doubt” about what the pain trade will be in the second half of this year — and that is lower oil prices.

BofA’s survey, which included 266 participants with $US747 billion under management in the week through June 10, also ended before the US inflation for May was released.

“Wall Street sentiment is dire but no big low in stocks before big high in yields and inflation, and the latter requires uber-hawkish Fed hikes in June & July,” Hartnett wrote.

Naturally hawkish central banks were seen as the biggest tail risk to markets among investors, followed by global recession.

Long oil and commodities was the most crowded trade and that tells us that big global investors have as little idea about what is going to happen as smaller investors does.

It’s a case – ‘gold’s up, invest in gold’ – how reactive. As the BofA strategist said, oil is going to be a ‘pain trade’.

Commodities have sold off in the past 10 days, led by copper, iron ore, some types for coals and now oil.

China still suffers from Covid aversion, but will that turn into one of those mythical sneezes that manifest into widespread cold-catching?