American investment strategist says current rallies are driven by FOMO, cites past crashes as warning for advisors
The driving force behind markets’ continued rallies and recoveries, one analyst says, has moved from central bank liquidity and a reassessment of profitability to investor FOMO and a greater disconnect between markets and the underlying economy. This analyst says the signs point to danger.
Robert Almeida, global investment strategist with MFS Investment Management in Boston sees the market recovery as segmented into three "buckets". The initial bounce back, he says, came from central bank moves that removed the liquidity tail risk creating “epic” levels of bankruptcy. In turn, assets were re-rated up. The second upward shift, he says, is from the hopes of a reopening and signs of renewed consumer activity from the full-scale shutdown of March and April. He says, though, that during that spike markets overestimated the return to profitability that would come from a reopening. The third phase, that Almeida thinks we’re in now, has been driven by investor FOMO as people with cash on the sidelines try to buy into the recovery.
“I can see short risk and long risk assets move together,” Almeida says.“That tells me that we've moved from a stage of overestimating profits to I think, a fear of missing out. A la 2007, 1999, and 1986.”
Almeida says he’s taking his analysis from histories of economic crashes, like Charles Kindleberger’s famous Manias, Panics, and Crashes, which details past market disasters from Dutch tulips and the South Sea Bubble through to 1929, the tech bubble, and the great financial crisis. That analysis looks at the build up to a crash through five stages. The first is an event prompting significant demand for something. The second is a bidding war in the markets and the real economy driving up asset prices. The third is FOMO, everybody decides to get in even though demand is far outstripping supply. Stage four is the catalyst, something that sends investors running for the exits. Stage five is the fall, when markets snap back and crash.
Almeida says that he thought we hit this crash in March, when investors were “vomiting their portfolios” as he puts it. However, he says, that despite all the pain of March and the hard places many investors find themselves in, the market didn’t actually hit its bottom. Given that the U.S. economy shrank by a third, Almeida says that central bank liquidity has kept markets from following that trajectory and finding their true bottom. While this was a necessary move, he says central bank decisions like this have more served to plug the holes of lost revenue than actually stimulate growth. That means, he says, the solvency risks haven’t been addressed so much as pushed out. Almeida says there’s a time horizon where the huge debts taken on by central banks come due and corporate profits haven’t made up the difference.
In that area, too, Almeida is pessimistic. He says that margins were compressed through 2019 and many investors have wrongly assumed that a reopening means a return to profitability. The knock-on effects of the pandemic and the hits to consumer confidence mean that profitability is unlikely. Companies may return to break-even levels, but making more money is highly unlikely.
In this bleak economic environment, Almeida says advisors need to take a look at the unique value proposition they offer their clients. From there, he says advisors should look hard at the risk assets they own and ask, if their clients were investing more today, would they recommend each asset? He says that self assessment and reassessment of assets will be key to building sustainable portfolios for clients that can weather what he sees as a coming storm.
“You want to find assets that are sustainable, assets that will work,” Almeida says. “Those assets might go down when everything corrects but that will be fine as long as they’re set up to sustainably bounce back on the other side. I focus on what a company does and how they can keep doing it. If you can own assets built for sustainability, it’s going to be fine. If you don’t, though, there’s no central bank that can bail you out this time.”
