Equity markets have rallied to end June, which is also the end of the second quarter, a time when client statements are calculated. Consider FOMO “fear of missing out” and “window dressing” as driving the markets higher into the end of the month/quarter.
Fear Of Missing Out (FOMO)
Remember, investors, whether less experienced or very experienced, get emotional when investing. If anyone has a thesis that the market is going down because the economic data is bad, and they have the ability to adjust their investments, more often than not, they will be underweight risky assets, such as equities. If the markets continue to move higher against their thesis, these investors will think that their thesis of a weaker economy may be wrong and may start to increase their exposure to the markets. If the markets continue to move higher and these investors are underweight equities, they will begin to feel nervous and a Fear Of Missing Out (FOMO) on further gains. So they will often hold their nose and buy more equities. Again, this happens for non-professionals and professionals a like.
Window Dressing
Investment managers that manage assets for clients always want to try to paint themselves in the best light, regardless of the situation. There can be times when investment managers are on the wrong side of the market (i.e. underweight equities because they are nervous) and will do what they can to make their clients’ investment reports better than what they actually are. This does not mean that they are manipulating performance in any way, that’s not where I’m going.
If an investment manager is underweight equities, and the markets have been in a strong rally, the investment managers will be nervous when investors get their investment statements. Statements are often generated on a quarterly basis, at a minimum. When clients receive their statements, they will look at 1) performance and 2) what they are invested in.
Investment managers (assuming they are legit) cannot manipulate the performance of an account. Performance metrics are usually generated by a larger custodian of the assets. What investment managers can “manipulate” is what you are invested in. Investment managers that have discretion on your accounts can buy/sell what they want based on your agreement with them and allow them to do.
If the equity markets have been up significantly, and your investment manager has been underweight or even short equities (whether you know/remember it or not), the investment manager could buy more equity exposure towards the end of the month before your investment statement is generated. So while the investment manager may have been underweight equities most of the quarter (or in-between reporting periods), the investment manager could increase equity exposure so it didn’t look like they were underweight and incorrect on the market for the entire period. This adjustments of portfolios to make it look like certain investment exposures were persistent throughout the reporting period is called “window dressing”.
Window dressing can also happen if certain investments decline in value and the investment manager sells it before the statements are generated to “hide” the losing position and avoid tough discussions with clients.
Any type of window dressing for statement presentation purposes is something clients should look out for when working with an investment manager.
Summary
While it is difficult to accurately determine why markets move higher or lower over any particular short time period like we have had over the last few months, remember that FOMO and window dressing are yet two other factors to be mindful of that may have nothing to do with the economy or company earnings that can move the financial markets. Over the last couple of months, a FOMO mentality and window dressing may have kept pushing the equity markets higher than others thought possible.