The stock market is high on tryptophan, hitting records.
Right ahead of Thanksgiving, 2020 looks to deliver the best November in 30 years. We’re grateful! You don’t expect it in a pandemic
. You’d think amid a plague we’d find bitcoin trading near $20,000. Oh, sure enough. Check.
Where is all the money coming from that’s pounding things to heights right along with real estate, speculative Electric Vehicle stocks from China with no revenue (NYSE:LI), and Elon Musk’s net worth (he is, however, putting people on the space station and recovering first-stage rockets for repeated use by landing them on a barge called “Of Course I Still Love You”)?
Here’s where it gets interesting.
Data from Morningstar, which reports monthly on fund flows, show US equity outflows in October near a monthly record of $46 billion, and over the trailing twelve months (TTM) topping $265 billion.
Active stock-pickers in US stocks have seen outflows of about $270 billion the past twelve months, including $35 billion in October. The spread in Active versus totals reflects a small net TTM gain for Passive equity funds.
Bonds crushed it, adding over $500 billion TTM taxable and municipal assets. But the biggie is the swing from Active to Passive across stocks and bonds, in total a $600 billion delta, with about $300 billion into Passive funds and out of Active ones.
Morningstar, always most conservative in gauging Active versus Passive assets, showed the latter overtaking the former in 2019.
Stripping data down, we’ve added a couple billion dollars, net, to US stock funds and hundreds of billions to bond funds, and the stock market is setting records.
You can’t say stocks are soaring on a flood of money. The data don’t support it. Nor can one say it’s “stock-picking.” Those assets are down another $300 billion the past year, a 12-year-long trend.
So what’s doing it? Clearly, something else.
To mark Thanksgiving last year, we presented Sentiment data in a piece called Blurry. As we observed then, stocks have spent the majority of the past half-decade above 5.0 on our 10-point Market Structure Sentiment scale, averaging about 5.4. That’s a GARP – growth at a reasonable price – market.
And son of a gun, Growth has outperformed Value.
In 2020, stocks have spent 62% of the time over 5.1/10.0 (GARP), and about a third of the time above 6.0/10.0, “Overbought” from a market-structure view.
Demand has exceeded supply. Yet we’ve just seen from Morningstar that money is flat in US equities. The inflows near $300 billion rushed not to stocks but bonds.
One thing so far is sure. Passive money will pay more for stocks than Active money. There are more Passive assets than Active ones now. Any net inflows go to Passive funds. The average price for all stocks in the S&P 500 was about $127 a year ago. Today it’s about $146, up 15%.
Well, it can’t be stock-picking, can it. And it’s thus circumstantially evident that Passive Investment is the reason why Growth has beaten Value.
It also explains the market’s relentless propensity to remain over 5.0. That’s the mean. Passive money tracks the mean. And, Passive assets are growing – so the outcome is Mean Plus, let’s call it. A little better than the mean.
ModernIR data show two more factors contributing to these outcomes. Fast Trading, machines pulverizing trade-size as intermediaries, are 54% of volume the past 200 days.
If your aim running algorithms is changing prices all day and finishing flat, and the market is 5.4/10.0, and Passive money is trying to peg the benchmark, what do you get?
A market that relentlessly rises.
It’s Mean Plus till the next time something like a Pandemic or a currency crisis, or something we haven’t thought of yet, rattles that cage.
Look, all of us want rising markets. It’s great for net worth. But as we’ve been saying to public companies, you can’t continue to make My Story the principal explanation. Somewhere in your quarterly board deck there’s got to be more than that. I’ve just given you some good data.
Energy companies, this is what’s happened to you. Back up 20 years and you were 15% of the market, even as we imported fuel. Today amid US energy independence you’re 2.5% of the market. AAPL is worth more than the whole sector. And AAPL is the most loved of all ETF stocks.
Investors, it’s why market structure matters. It’s a Mean Plus market for now. We’re grateful this Thanksgiving for it. But we might say a prayer for protection from its consequences too.