Stocks still have not reached capitulation point

Heaven knows we’ve been through enough acronyms in this market cycle.

FOMO — the Fear Of Missing Out, drove lots of investors, professional and amateur, in to spicy asset classes. No one wanted to be the last person to get in to the next big thing while excess money was sloshing around the global financial system.

TINA — There Is No Alternative — went a little further. It encapsulated the notion that fund managers had no choice but to buy risky stocks because boring old bonds were yielding so little, or indeed were costing money to hold even before you take inflation in to account. It’s “the market made me buy this rubbish”, but with a slightly sassier name.

But it seems we have not yet reached peak acronym. With bond yields now much higher, TINA is no more (RIP), and the market mood has turned. “We went from Fear of Missing Out to Fear Of Holding On,” as Peter Tchir, head of macro strategy at Academy Securities, put it this week. For my sins, I read a lot of research from banks and investors. But “from FOMO to FOHO” is a new one on me.

Tchir is referring here to the dreaded bitcoin — an “asset” for want of a better word that is maturing like a fine glass of full-fat milk on a summer’s day. If you have managed to avoid this week’s crypto drama (well done you), then the bits you need to know are that its collapse in price has morphed from the stage where prices are falling, which began in November, to the point where they are dropping double-digit per cent a day and the platforms that offer trading in them start to seize up and struggle to hand back cash to the people who have gambled on the coins.

One platform, Bybit, is offering “risk averse traders” products it describes as “low-risk savings” for up to “999 per cent annualised interest”. Terms and conditions apply. That is not a typo but is a sign that everything is definitely fine in this very serious market that is not at all desperate for new cash, honest.

Line chart of $ per coin showing Bitcoin declines by double digits

The stage after this is when you start to worry about whether a full-blown price collapse will affect other markets (the jury is out on that one) and the ripple effects when the venture capital, private equity or even typically staid pension fund investors that backed these intermediaries start wearing losses. That will be fun. But I digress.

The point is that crypto has finally demonstrated a useful function.

Currency for buying, you know, stuff? No. Store of value? Not really. Inflation hedge? Definitely not. But as the most speculative asset on the planet, possibly even the most speculative of all time, it looks like a handy warning of calamities to come. The crypto canary in the coal mine. The big question is whether the FOHO haunting crypto will start to afflict stocks.

It does not feel like we are there yet. Yes, stock markets have suffered so far in 2022. This year is shaping up to be a real stinker in equities. The S&P 500 index is in a bear market, down more than 20 per cent from its recent peak and even the FTSE 100, generally shielded from strife thanks to its large commodities weighting, is off more than 4 per cent this year.

Line chart of S&P 500 index showing Wall Street's blue-chip benchmark enters bear market

Buying the dip remains an extreme sport. “US stocks have suffered the biggest year-to-date losses since at least the 1960s,” as the BlackRock Investment Institute pointed out this week. “That’s ignited calls to ‘buy the dip’. We pass, for now.” Profit margins are at risk from energy and labour costs, valuations have not fallen far enough, and the US Federal Reserve could tighten policy too hard for its liking, BlackRock said. After raising the benchmark rate by a historic three-quarters of a percentage point this week, the Fed itself acknowledged that slamming on the brakes will inflict “some pain”.

But even if few are brave enough to top up equity allocations on the (relative) cheap, many appear unwilling to really give up just yet.

Jeroen Blokland, formerly at Robeco Asset Management and now running research house True Insights, points out that the S&P dropped by almost 4 per cent in a particularly ugly day at the start of this week. That’s a lot. But he says it is only the 39th worst one-day drop since 2005. His sentiment indicator is still in neutral territory, not yet in the fear zone. His conclusion: no capitulation.

One banker noted a curiosity to me this week: when you ask investors if they are miserable and terrified, as Bank of America frequently does in its monthly survey, they say yes. “Wall St sentiment is dire,” the bank observed this week. But when you ask about their holdings, most have not binned their favourite riskier assets. “People are going to have to start selling the things they really really like,” the banker says. “There’s still capitulation to come.”

The nerves are showing. “I’ve never had such good access to chief investment officers and CEOs,” he says. “They want to talk.”

That suggests investors are desperate for ideas and insights in to what might happen next and, unusually, in to what their peers are doing. If FOHO hits stocks, no one wants to be the last to get out.


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