Speculative Euphoria and the Fear of Missing Out

Special Interim Update

“The failure of the general market to decline during the past year despite its obvious vulnerability, as well as the emergence of new investment characteristics, has caused investors to believe that the U.S. has entered a new investment era to which the old guidelines no longer apply. Many have now come to believe that market risk is no longer a realistic consideration, while the risk of being underinvested or in cash and missing opportunities exceeds any other."

– Barron’s Magazine, February 3, 1969

The S&P 500, having peaked a few weeks earlier, was down 36% by May 1970. Perhaps more importantly, the cumulative total return of the S&P 500 lagged the cumulative return of Treasury bills from November 1968 until December 1985.

This comment began as a brief “weekend update” to our internal team. Those have become more common in the past few weeks as market conditions have become increasingly extreme. I decided to expand the content and publish it as an interim note instead.

The reason is that even though the S&P 500 and Nasdaq 100 have struggled to match Treasury bill returns for over two years, investors seem to be developing an excruciating and nearly frantic “fear of missing out.” Lots of pressures are driving that fear: the recent push to nominal record highs, enthusiasm about an economic “soft landing,” an expected “pivot” to lower interest rates, and most recently, euphoria about the prospects for artificial intelligence.

While I’ve planned a deep dive into profit margins, interest costs, mega cap effects and other factors for next month’s comment, this brief note is about none of that.