Morgan Stanley: FOMO Isn't a Good Thing in This Market

It's not surprising that people are starting to look at the markets again with something other than worry in their faces. With state economies starting to come back online, pent-up demand ready to express itself in the grandest fashion, and $1,200 checks burning a hole in the collective pockets of long-denied American shoppers, diners, and patrons of various sorts, the stock market should come surging back, right? ...right? Well, that's leading some to get a wicked case of a new and altogether familiar mental disorder: FOMO, or the Fear Of Missing Out. Morgan Stanley (NYSE: MS) recently revealed information that that's not a good sign in this market.

But FOMO is Just Greed, Right? What, Was Gordon Gekko Wrong??

Right now, classic lines about how greed is good are likely echoing through investors' heads. Greed also does wonders in terms of improving stock market values, and given the plunge we've seen over the last few months, anything that lights a fire under this market can't be all bad.

But the word from Morgan Stanley Investment Management's head of global balanced risk control strategy, Andrew Harmstone, suggests otherwise. He claims, shockingly enough, that FOMO here is actually a very bad sign of things to come.

The recent gains, and the FOMO that comes along with them, come at a pretty bad time for the markets, Harmstone notes. Essentially, investors are ignoring the damage that's been done already, and are of the mind that recovery will start fairly quickly as we reopen the economy and send things back on an upward curve to where we were back in, say, January.

Basically, Harmstone suggests that investors are being overly optimistic, hoping that the recent lockdown relentings seen across the country are part of the package toward getting us all back to something much closer to normal than we saw in the last half of March and all of April.

The Smoke Clears, and...Oh My....

The problem with that notion, of course, is that this is a lot like the smoke clearing after a forest fire. Now we can see what the actual damage looks like, and that damage is likely to be a lot more extensive than anyone expects.

Businesses have been closed, or operating under so many ridiculous strictures that they might as well have been closed, but were paying employees, rent, and utilities anyway. One of the first things we're likely to see as the country opens back up is bankruptcies and lots of them. We've already seen J. Crew file for bankruptcy, and recent word noted that Neiman Marcus finally pulled the trigger on its own bankruptcy case. Throw in shaky demand amid massive unemployment and it might be a worse picture than expected.

That isn't to say these businesses that file bankruptcy will be going away—Chapter 11 bankruptcy is notorious for giving companies a way back from the brink—but healthy companies with hearty bottom lines typically do not file for bankruptcy. These companies, and others like them, are likely to end up taking downgrades at the analyst level, and the market will almost certainly respond accordingly. That's going to mean another downward leg for businesses post-coronavirus. Harmstone notes that volatility is likely to remain “extremely high”, so sitting things out a little while longer may pay off in the long run.

Disaster, But Maybe Not Complete Disaster

Essentially, what Harmstone seems to suggest here is that investors are piling back in just a little too fast, thinking we've hit the lows and it's only up from here. Rather, Harmstone thinks that there's still more low to go before the upward swing kicks in, so those who invest now are buying into the last dogleg down rather than the upswing.

It's not that that's such a bad thing—after all, investors still own the shares that are likely to climb—but rather, it's more a matter of timing than anything. The market recovery is likely to come; there's enough pent-up demand out there after being shut up for two months for it to not, and though unemployment is spiraling out of control right now, the idea of it recovering once the government gets out of the way and lets places reopen—with the right precautions of course—is not out of line.

Remaining a bit defensive yet can be a hard pill to swallow, but given the market right now, it's not such a bad idea to keep a low profile for a little while longer.