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

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
VIX,
+3.88%
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
BTCUSD,
-1.86%
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 data for October are due for release, with expectations of accelerating prices both at the headline and core level. Economists at TD Securities, led by multiple MarketWatch Forecaster of the Year winner Jim O’Sullivan, say they expect strong gains in energy, used vehicles and health insurance. But by next year, they expect inflation to slow significantly as fiscal stimulus fades and supply constraints ease.

Rivian Automotive priced its IPO at $78 per share, valuing the Amazon-backed
AMZN,
+2.50%
electric-truck maker at $77 billion, above its raised targeted range.

DoorDash
DASH,
-0.59%
struck a deal to buy Finnish food delivery company Wolt for €7 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
GRUB,
+3.12%.

A European Union court upheld a $2.8 billion antitrust decision against Alphabet’s Google
GOOGL,
-0.08%.

Coinbase
COIN,
+0.98%
shares reeled after the cryptocurrency platform revealed a less-volatile environment led to worse-than-expected revenue in the third quarter.

Unity Software
U,
+5.23%
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,
-1.00%
reports results after the close.

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The buzz

Stock futures
ES00,
-0.35%

NQ00,
-0.56%
soured ahead of the CPI release.

The yield on the 10-year Treasury
TMUBMUSD10Y,
1.482%
was 1.48%.

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