The FOMO Drought

Episode Summary

Executive Summary: The episode examines a 2023 “FOMO drought” in equity and ETF flows: despite strong market gains, investors are not chasing performance. The hosts and guest argue that high money-market yields, Fed tightening, recession/debt-ceiling worries, and scar tissue from 2022 are keeping capital in cash, bonds, quality stocks, and even inverse ETFs rather than flowing into risk assets like QQQ, crypto, and ESG.

Main Topics: The 'FOMO drought' in equity flows (Priority: 5/5): Markets are up strongly, but ETF and fund flows are unusually weak, suggesting investors are not rushing to buy the rally. Money-market funds as a cash magnet (Priority: 5/5): High short-term yields around 4%–5% are drawing huge inflows into money-market funds, diverting capital away from equities and boosting a risk-free alternative. Shift from bullish to bearish leverage trading (Priority: 5/5): Leverage ETF behavior has inverted: investors are now buying inverse products like SQQQ on rallies instead of buying TQQQ on dips, signaling skepticism toward the market. Weak appetite for crypto, ESG, and high-beta themes (Priority: 4/5): Areas that performed poorly last year—crypto miners, crypto broadly, ESG, and high-growth themes—have rallied, but investors remain reluctant to re-enter after prior losses. International equities still failing to attract broad flows (Priority: 3/5): Despite some strong foreign market performance, the discussion argues that US investors remain structurally US-centric and are not reallocating materially abroad. Bond and quality stock preference (Priority: 4/5): Top inflows are concentrated in Treasuries, aggregate bonds, and quality-factor ETFs, reflecting a more defensive, fundamental, and sober market posture.

Key Arguments: High money-market yields are suppressing risk-taking because investors can earn attractive returns without equity risk. ETF flows are far below what would normally be expected in a year when major US indices are up double digits. The Fed’s rate hikes have changed market psychology by removing the policy tailwind and replacing it with constant macro and inflation headwinds. Inverse ETF popularity, especially SQQQ, suggests retail investors are skeptical of the rally and positioning defensively or tactically bearish. Crypto and ESG are suffering from both prior losses and reputational damage, making investors slow to return even when prices improve. International outperformance has not been enough to overcome US investor home bias or to trigger large portfolio reallocations. Current flow patterns imply that professional and retail investors alike are favoring caution, bonds, and quality over growth and momentum.

Data Points: S&P 500 / Nasdaq returns: up a lot; QQQ up about 20%–25% - Hosts cite strong equity performance despite weak inflows. Money-market rate: about 4%–4.5% (near 5% risk-free equivalent mentioned) - Guest says high cash yields are a major reason investors are staying sidelined. Money-market fund growth YTD: about $500 billion - Shown as a major driver siphoning flows from equities. US equity ETF flows this year: about $10 billion to $15 billion - Compared with about $1 trillion over the prior two years. US equity ETF flows over prior two years: about $1 trillion - Used to illustrate how weak current demand is. Fixed income ETF flows this year: about $60 billion to $70 billion - Highlights the large gap versus equity flows. VanEck crypto miners ETF (DAM) performance: up over 100% - Used as an example of a strong-performing product that still failed to attract inflows. Inverse ETF inflows: $6 billion this year - Shows how much capital is going into bearish positioning. Inverse ETF asset growth: 25% increase in assets - Demonstrates the scale of the move into short products. SQQQ trading rank: around 4th or 5th most traded - Previously around 50th; indicates a major shift in retail behavior. SQQQ holder share on Bloomberg Terminal: 3% reporting institutions - Suggests most ownership is from small investors rather than institutions. Twitter poll on US equity exposure: 26% increased, 30% decreased, 42% unchanged - Poll cited to support the idea that more people are sellers than buyers.

Pivotal Quotes: "It is an unusual year because if you look at the equity markets, they're doing great... Nobody is buying into this rally. It’s like, as we call it, a FOMO drought." — Eric Balchunas: Defines the central thesis of the episode. "The money market effect should not be understated here. This is a big deal. 5% yield, just about, on a pretty much a risk-free asset class." — Eric Balchunas: Explains why cash is winning against equities. "So anytime the market goes up a little, they're going right down to the short side... They're buying the dip still. It's just inverted." — Eric Balchunas: Describes the reversal in leverage ETF behavior from bullish dip-buying to bearish rally-selling.

Implications: Investor behavior looks more defensive than headline index gains suggest. If rates stay high, cash, bonds, and quality may keep absorbing capital while risk themes struggle to regain momentum until the Fed clearly signals it is done tightening.