‘FOMO’ creeps into markets as stocks post best month in a year

Stocks that got slammed amid fears of higher-for-longer interest rates caught a second wind during the roaring November market rally.

The S&P regional bank index (KRE) rose more than 16% during the month, including a more than 2% gain on Wednesday. Cathie Wood’s flagship Ark Innovation ETF (ARKK) gained more than 34%. Meme stocks are soaring too, with the broad Roundhill Meme ETF (MEME) rising more than 20% in November and meme stock favorite GameStop moving up over 20% on Wednesday alone.

The small cap Russell 2000 Index (^RUT), which had been largely avoided due to fears that high interest rates would sink small companies, gained more than 9% in the month.

“Traders have decided that even though it’s still earning nearly 5%, cash is trash compared to quick profits in a wide variety of risk assets,” Interactive Brokers chief strategist Steve Sosnick wrote in a research note on Wednesday.

Sosnick adds that the root of what he described as a fear of missing out, or “FOMO” rally, is the “expectation that rates will be coming down, and that is indeed a solid reason for a rise in risk assets.”

Fears of another Fed rate hike had weighed on the broader indexes and particularly on tech stocks, between the Fed’s September meeting and the one on Nov. 1.

When the S&P 500 (^GSPC) bottomed in late October, institutional investors were caught “flat-footed,” eToro US investment analyst Callie Cox told Yahoo Finance. According to a measure by the National Association of Active Investment Managers, investors were their least exposed to equities in more than a year.

So as signs of cooling inflation built a case for investors to believe the Fed may not only be done hiking but could even cut rates soon, they piled into interest rate-sensitive sectors throughout last month in an effort to “performance chase,” Cox said. Real Estate (XLRE) and Technology (XLK) gained more than 12% in November while Financials (XLF) and Consumer Discretionary (XLY) rose more than 10%.

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“Many [institutional investors] are rushing into these high-duration sectors, which is powering the rate cut trade, and that could last until the end of the year,” Cox said.

Now with that active managers index at its highest level since the top of the AI-driven rally in the summer, the key question for investors will be if markets have too aggressively priced in rate cuts and if investors are overall too bullish on stocks despite myriad headwinds headed into 2024.

For its part, the Federal Reserve has attempted to temper expectations about rate cuts.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Fed Chair Jerome Powell said Friday in prepared remarks at Spelman College in Atlanta.

Invesco chief global market strategist Kristina Hooper told Yahoo Finance on Thursday that the Fed is “incentivized” to talk markets down so financial conditions don’t ease too far and prove to be an upside risk to inflation. But that doesn’t mean investors will be wrong.

“The market is excited,” Hooper said when discussing if markets had gone too far during the November rally. “But I don’t disagree about the [rate] cut. I think we’re likely to see that. Very likely to see that … We probably will see some movement down in markets, some tamping down in markets. But the reality is that inflation is coming down.”

Other strategists agree that stocks haven’t gotten over their skis yet, either. Bank of America noted in a new research note on Friday that investor sentiment, as tracked by its Sell Side Indicator, ticked up in November amid the rally but remains “more bearish than bullish.”

“Despite growing expectations for a soft landing, we are still far from a market environment dominated by high conviction and euphoria,” Bank of America’s head of US equity & quantitative strategy Savita Subramanian wrote.

For Cox, key indicators within the market aren’t flashing red yet. For example, Bitcoin (BTC-USD) has soared about 50% over the past month, but Cox hasn’t yet seen any aggressive moves into alternative cryptocurrencies, like the 2021 rush into Dogecoin (DOGE-USD) and other alternative coins with limited practical use cases.

“Speculation is never going to go away,” Cox said. “It’s just going to happen in degrees. And I think the speculative trading we see these days is a shell of what we saw two years ago … Investors aren’t just closing their eyes and buying. They’re really thinking about what can survive in what is still a treacherous environment. Rates are still high. There’s still a lot of uncertainty out there.”

Top view image of puzzle with text FEAR OF MISSING OUT or FOMO. (Freepik) (mohd izzuan via Getty Images)

Josh Schafer is a reporter for Yahoo Finance.

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