What the…?
Everything was awesome. Monday. Then yesterday, stocks toppled like a thawed corpse in Nederland (inside joke, there).
No obvious reason.
Photo 66699772 | Everything Awesome © Viacheslav Iacobchuk | Dreamstime.com
Some said it was Jay Powell testifying today and tomorrow. Others claimed it was Big Tech coming apart at the seams (great song I’ve used before: Things start splitting at the seams and now, everything is tumbling down. I’ll let you look it up.).
Issuers, this is your market we’re talking about. It’s supposed to exist for you and your investors.
Let me spell it out. A stock market that behaves like The Walking Dead – bereft of human reason – is a stock market that DOES NOT HELP YOU.
So it’s not directly about financial performance. Sure, your earnings may matter. But it’s true only to the degree that the money is motivated by earnings.
How much money is motivated by your earnings? I had this conversation yesterday (in person!) with the IR team for one of our clients. I said, “If 51% of the money owning your shares, or 51% of your trading volume came from stock-pickers, you should include in your earnings release anything they want. They drive shareholder value.”
But neither thing is true. Now, 70% of your stock is owned by money following models, or mimicking (closet indexers) models. And 90% of your volume is something besides stock-picking. Math.
So, what should go in your earnings release? It’s machine-readable. What do you want machines to read that react in 100 milliseconds to price-changes?
Exactly. Not much. Not sure? Ask me.
And helping not one iota, the stock exchanges have done a crap job telling you, public companies, where the money is and how to get in front of it. Don’t they owe you a fiduciary duty to tell you what the money is buying?
Answer: Yes.
Between us, I think it could be actionable, a legal word meaning a court might find that somebody losing a battle with you may owe you money.
A stock exchange should never urge a company to list shares publicly when the exchange knows it’s a bad idea. That’s fraud. And it’s true for any company without at least $5.5 billion of market capitalization before listing.
Why? Because the money going to small caps – that bar – is shrinking, not expanding. Therefore, the probability of rising capitalization is a number approaching zero. Well, 1%. SMCI and MSTR are two of two thousand and 90% of the Russell 2000’s gains.
And S&P Global promptly added one of those two to the SPX.
But who cares? Apparently, no one.
Look, I think our profession has done a lousy job at it too. What is the ONE THING every public company ought to know? What the money is buying, for crying out loud.
Do you know?
Mull that.
Here’s why the stock market does stuff like what it did Monday. We depend on this market. I wrote last week to users of our EDGE decision-support platform about rising probabilities of big trouble. I’ll give you a list:
- Anomalous moves. Gains for stocks since Oct 26 rank in the top 1% for market performance back to the Great Depression. Maybe further. The probability of maintaining that performance is 1%. Yes, I know there are a host of people including Sam Stovall saying “when the market rises in the first two months, it rises the rest of the year 97% of the time.” Fine, it might. But what it’s been doing since Nov 1 has a probability of duplication of less than 1%.
- Big patterns. You’ll have to trust me here, but in the data behind S&P 500 stocks patterns have been massive since Mar 2020. Those patterns have vanished. Maybe it’s nothing. Maybe there’s no more money to buy stocks. What emerged in the last week is the biggest collapse in Passive money, and the biggest offsetting rise of machines, since Jan 2018. It says monetary policy is about to change. Since what put the market into the 99th percentile was monetary policy, we can expect. Which we got in 2018.
- Outsized buying. Since Nov 1, buying in the S&P 500 has trumped selling 4-to-1. Awesome, yes. Extreme outlier. I’m not sure we’ve EVER seen that kind of buy/sell imbalance. It’s, literally, four to one. Four buying days for every one selling day. Never seen anything like it. Can that continue? Fact, not probability.
- Volatility down by half. Good right? What always follows periods of low volatility? Periods of high volatility. And volatility is the linchpin to market-making in ETFs, which now outnumber stocks in the US national market system. Without volatility – a spread between ETFs and a basket of stocks – there is no motivation for machines to make markets in both. So they quit in one. Causing volatility.
- Collapse of the “Magnificent Seven.” When the big stocks to which everyone is leveraged (and we’re levered to the Federal Reserve too) stop working, it’s not “broadening out in the rally.” It’s the end of what caused the market to rise. Those stocks are $100 billion of daily liquidity. Nothing replaces them. So money will have to quit equities. See point #2.
- An economic mismatch. Economists on the left and right are calling current conditions good. Government spending in the economy has doubled as a percentage of GDP. Even John Maynard Keynes, father of deficit spending who called inflation the way governments confiscate wealth (look it up) would have said it should happen only during private-sector contraction. Now we call it “growth.” We have record debt on every front. Banks are underwater on obligations by colossal sums. The Federal Reserve’s balance sheet is upside down by nearly $1.5 trillion and it’s paying out $200 billion more in interest than it takes in. Sustainable? Path to bankruptcy.
- Everyone says everything is awesome, while everyone behaves like it’s not awesome. The erstwhile President, who never led a poll in 2020, has led the current President in all poll averages for more than 100 days. Need I say more?
So, might the market suddenly lurch? Yes. And it could be bad. Perhaps as unprecedented as these conditions. I just don’t know when.
