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Fear of missing out is driving the stock market — and having this surprising effect as well, research finds

By Steve Goldstein

Critical information for the trading day

Tuesday marked the end of a remarkable run of eight straight advances for the S&P 500 , and to be honest, apart from Tesla (TSLA), things weren't actually that bad -- 249 components rose versus 247 that fell.

So what's driving investment behavior that has sent the S&P 500 up 25% this year? Is it fear of missing out? Yosef Bonaparte, the director of external affairs in finance and associate professor of finance at CU Denver Business School and a Janus Henderson Investors research associate, decided to quantify the term that has been around for around 20 years, and used widely enough that it has spawned academic research and even an exchange-traded fund with FOMO as a ticker. In his own research paper, Bonaparte devises a FOMO index, based on market momentum, Google keyword searches and investor use of margin accounts.

"We believe that for FOMO to exist, we need to have a momentum in the stock market; we need investors' news sentiment to be high, we call it FOMO news sentiment; and we need investors to take some additional risk, and we call it FOMO risk," says Bonaparte, who has also studied topics including investment behavior by age and partisan affiliation

Studying data from 2004 to June, he finds a pronounced FOMO effect starting in 2010. And there's a big sector split, with the top five sectors being entertainment, recreation, electronic equipment, steel works, and printing and publishing. The only sector not influenced by FOMO is gold/precious metals.

There's more. Bonaparte says FOMO increases the propensity to participate in the stock market, increases risk tolerance, and boosts overconfidence, which he proxies by looking at the number of trades. It's also more prevalent among minorities, risk takers, and uneducated households, he concludes, by examining the Federal Reserve's survey of consumer finances about how households search for information about stocks. (Gender, to his surprise, makes little difference.)

FOMO, he finds, actually reduces volatility as measured by the popular fear gauge, the VIX index, and reduces stock-market activity. "Then we can say there is less volatility or less disagreement when as the FOMO index increases, more investors become bullish and less bearish," he writes. That behavior doesn't hold true for cryptocurrency, as bitcoin volumes rise with FOMO. "A plausible explanation is that investors view bitcoin a speculative asset and equities as less speculative, and therefore volume behaves differently with more funds flowing into speculative assets than equities," he says. FOMO also lifts price-to-earnings ratios, to no surprise to anyone looking at the rise in the cyclically-adjusted price-to-earnings ratio.

Answering questions from MarketWatch, Bonaparte says investors can use the information to figure out what's fundamental and what's not. In October, the FOMO index surged 5.2%, after a 2.7% pullback in September, he says. The S&P 500 jumped 6.9% in October after dropping 4.8% in September.

The buzz

U.S. consumer price growth accelerated to 0.9% in October, the Labor Department reported on Wednesday, coming in higher than the 0.6% rise forecast by economists.

Core price growth accelerated to 0.6%. Over the last 12 months, prices have gained 6.2%, a 31-year high.

Rivian Automotive priced its IPO at $78 per share, valuing the Amazon-backed (AMZN) electric-truck maker at $77 billion, above its raised targeted range.

DoorDash (DASH) struck a deal to buy Finnish food delivery company Wolt for EUR7 billion ($8.1 billion) in stock. Investor Cat Rock Capital Management published a presentation on its call to break off Grubhub from its new owner, Just Eat Takeaway.com .

A European Union court upheld a $2.8 billion antitrust decision against Alphabet's Google (GOOGL).

Coinbase (COIN) shares reeled after the cryptocurrency platform revealed a less-volatile environment led to worse-than-expected revenue in the third quarter.

Unity Software (U) struck a $1.6 billion deal to buy visual-effects company Weta Digital, which is chaired and co-founded by "The Lord of the Rings" director Peter Jackson.

Entertainment giant Walt Disney (DIS) reports results after the close.

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The market

Stock futures were pointing to a weaker start after the CPI release.

The yield on the 10-year Treasury was 1.49% and the 2-year yield climbed 5 basis points.

Random reads

Prince Harry says he warned Twitter (TWTR) CEO Jack Dorsey that a coup was being planned on his platform, ahead of the Jan. 6 riot in the Capitol.

A second series of the popular show "Squid Game" is coming, though it isn't official that it will end up on Netflix (NFLX) again.

Here are the most expensive ZIP Codes in the country.

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-Steve Goldstein

 

(END) Dow Jones Newswires

11-10-21 0902ET

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