The fear of missing out has played a role in recent market movements but that’s “not a good sign,” according to Andrew Harmstone, head of global balanced risk control strategy at Morgan Stanley Investment Management.
“The fear … of missing out, or another term for that traditionally has been greed, right? It is definitely playing a role in the current market,” he told CNBC’s “Street Signs Asia” on Tuesday.
Markets saw a relief rally in April, with the S&P 500 and Dow Jones Industrial Average posting their best monthly performances since January 1987. But the surge came after the initial shock of the coronavirus pandemic and a historic plunge in global equities in March.
Harmstone argued that the gains came as investors denied the “damage that’s actually been occurring to the global economy.” He explained the behavior indicated that “people still think that things are going to go back to normal, or what they were recently, quite quickly.”
Investor optimism has been fueled by the prospect of authorities lifting lockdowns and relaxing other restrictions intended to curb the spread of the coronavirus. Those measures had taken a huge toll on global economic activity.
But the real extent of that damage will become “visible” in the next phase, beginning with “actual bankruptcies” or at least downgrades of companies, Harmstone said. The market is likely to respond accordingly, he warned.
“The key element here is that volatility remains extremely high,” Harmstone said. With the markets seeing big shifts in either direction every day, a 1% move is comparatively “small” nowadays, he added.
Limiting portfolio risk
For investors, this means that they need to keep their portfolio risk level low and maintain a defensive position while looking for opportunities to add value, Harmstone said.
“It’s true that … by maintaining a defensive position you’re not capturing the full benefit of the rally, but remember, volatility is so high that even a defensive position still actually gives you a fair amount of upside just because the moves are so big,” he said.
Harmstone cautioned that investors face potential of overexposure to a “disproportionate amount of downside risk” if the recent relief rally ends.
To date, more than 3.7 million people have been infected while at least 263,000 lives have been taken, according to data compiled by Johns Hopkins University.