Reality check for the FOMO rally in equities

Much has been made of the speculative fervour that underpinned the gains in equity markets at the start of the year. After a challenging 2022, there was sharp rebound in riskier assets with investors seemingly taking a more bullish view of the world, particularly on the path of interest rates.

But beneath the shift, there were signs that the foundations of the “fear of missing out” rally might have been shakier than it initially appeared. They help explain the recent retracement of gains and why there are reasons for caution now.

Rather than being driven by stickier investments in traditional equities or funds, much of the rally was underpinned by factors such as the covering of short positions and a frenzy in US options activity.