The S&P 500 SPX was worth a run of eight straight advances on Tuesday, and to be honest, it was not that bad, 249 components rose against 247 that fell.
So what s driving investment behavior that has sent the S&P 500 up 25% this year? Yosef Bonaparte, director of external affairs in finance and associate professor of finance at CU Denver Business School and 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. Bonaparte developed a FOMO index, based on market momentum, keyword searches and investor use of margin accounts, in his own research paper.
We believe that for FOMO to exist we need to have a start in the stock market, we need investors news sentiment to be high, we need investors to take some additional risk, and we need investors to take some additional risk, and we call it FOMO risk, says Bonaparte, who studied topics including investment behavior by age and partisan affiliation.
He finds a pronounced FOMO effect starting in 2010, studying data from 2004 to June. There is a big sector split, with the top five sectors being entertainment, recreation, electronic equipment, steel works, and printing and publishing. The only sector that is not influenced by FOMO is gold's precious metals.
Bonaparte said that FOMO increases the ability to participate in the stock market, increases risk tolerance and boosts overconfidence, which he proxies by looking at the number of trades. He said it's more common among minorities, risk Takers and uneducated households because of the Federal Reserve s survey of consumer finances about how households search for information about stocks. Gender, to his surprise, makes little difference. He believes that FOMO reduces volatility, as measured by the popular fear gauge, the VIX VIX, index, and reduces stock- market activity. He writes that there is less volatility or less disagreement when the FOMO index increases, more investors become bullish and less bearish. volumes rise because of FOMO as coin doesn't hold true. He said that investors think that a speculative asset and equities are less speculative, and therefore volume behaves differently with more funds flowing into speculative assets than equities. Anyone looking at the rise in the cyclically-adjusted price to earnings ratio is not a surprise, as FOMO lifts price-to-earnings ratios.
In answering questions from MarketWatch, Bonaparte says investors can use the information to find out what is fundamental and what is not. He said that the FOMO index in October went up 5.2%, after a 2.7% decline in September. The S&P 500 went up 6.9% in October after dropping 4.8% in September.
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