This morning, while having one of our frequent market discussions, I misheard my friend Steve Sears. I was confused when he mentioned FOMO in the context of interest rate decisions. In fact, he had said FOMC. It occurred to me later that those two highly similar 4-letter acronyms can pretty much describe the entirety of the recent action in the equity markets.

For those of you who would like a quick refresher, FOMC is short for the Federal Open Market Committee, the rate-setting arm of the Federal Reserve. Saying that the markets are obsessed with anticipation of the group’s next move may be an understatement. Equity markets turned around seemingly overnight when Fed Chairman Powell indicated that the FOMC would be considering a more accommodative stance. Futures markets indicate certainty that the Fed will cut rates at the end of July – they only imply a dispute about the size of the cut (currently about 78% for 25 basis points and 22% for 50 bp) 

The term FOMO is far less formal. It is shorthand for Fear of Missing Out. The term is thrown around when markets trade higher on positive momentum. It is human nature to want to participate as stock prices move higher, particularly if you are a portfolio manager whose bonus depends upon relative performance. Momentum trading is relatively easy, and trend following can be profitable. Much of that is thanks to FOMO. Why else would financial assets behave differently from other goods in having their demand rise as their prices increase?

While these two acronyms can be very descriptive for the market, they shouldn’t provide an investment rationale. If there is a rate cut in the works, an investor needs to consider how much is already being discounted by the market and whether any actions to bolster liquidity are in response to a poor economic outlook that will weigh on corporate earnings. And every responsible parent has warned their children not to do things just because their friends are.

Acronyms are convenient, but they replace critical thinking.