There’s a moat between haves and have-nots in the stock market. 

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Photo 84244231 | Inequality © Prazis |

The S&P 500 Equal Weight Index that treats the 500 components the same is up 0.5% through yesterday versus Dec 31, 2021.  Cumulative inflation over that time is 13%.

So the equality index is down about 12% net, give or take.

By comparison, the weighted S&P 500 index is up 15.6% comparatively, or about 2.6% after inflation. It’s a shocking spread – about 15%.

NVDA is up 317%.  About 304% after inflation.  MSFT is up 37% (23% after inflation). AAPL, AMZN, META, AVGO, LLY, BRK.B, GOOG, GOOGL.

Take the whole lot.

They’re up 92% on average since Dec 31, 2021, about 79% after inflation. I use those because they’re the top ten holdings in the world’s largest index fund (VTSAX), a proxy for the most widely held (Vanguard Total Stock Market Index).

And your point would be, Quast?

Most of the market is down, not up, over the past two years. 

The Russell 2000 is down over 9% since Dec 31, 2021, which isn’t even the post-Pandemic high.  It’s down over 22% after inflation.

Maybe what you do, investors, is buy the top holdings in SPX, IVV, VTSAX.  That’ll work until everyone sells.

And that’s what Active money is doing, issuers. Stock-pickers own the same stuff as index funds but management costs are 5-10 times higher.  I wrote about this a couple weeks ago. You can buy VTSAX above, which is beta, the market, for four basis points.

And there’s your source of inequality.  Passive investors will own the most liquid stocks, which become the benchmark. It’s not for that reason alone!  Big companies get big because they have catalysts. But only 1% of stocks catalyze the market. 

It’s true now with that lot, above. 

Then those become the benchmark, and become beta – the performance of the market. And everyone owns them. 

But don’t index funds have to own the index?  Sure. But not equally!  All indexes and ETFs use a basket, a statistical sample. A poll representing the whole. They’ll replicate the index only periodically (that’s why actively managed ETFs have exploded – no index to replicate).

But the basket is going to be the LIQUID stuff, the BIG stuff. Because you can get in and out of it. Net inflows go to those, the reason NVDA, AVGO, go up triple digits.

And periodically, the big Passives will dump these big stocks into the redemption basket to give to JP Morgan, Morgan Stanley, Goldman Sachs, Jane Street, Citadel, who in turn dutifully remove some ETF shares. 

And all the big stocks plummet. And the indexes true up their positions in other things. 

And the process begins again.

This cycle fosters haves and have-nots. I’ve had a lot of conversations with investor-relations officers and executives in recent weeks.  It’s what I do. But just in the last day or so, I talked to a half-dozen investor-relations officers (IROs). Paraphrased sample:

Small-cap IRO: Every time our stock is moving I find out because the c-suite starts calling me asking what am I doing about it and why are people selling?

Mid-cap Consumer Discretionary IR team: We’ve executed well. But we are SO volatile. Consumer Discretionary offers so much data to hedge funds, every conceivable data point, from consumer behavior to supply chain to inventory.

Large Cap Tech IRO:  I don’t think much has changed. We do our thing, reaching out to investors, we pick up investors as a result. 

There’s your haves, have-nots.

The small-cap IRO is vexed, the c-suite stressed.  They don’t understand that the money chasing small-caps has been cut in half the past decade. They need to know how the stock market works.  Active money is 8% of trading volume in that stock. Short Volume – borrowed stock including exempt market-making – is 80% of its volume!

What to do? Educate the c-suite on how the market works, and why. And shift from trying to create ALPHA, to delivering BETA.  If you want to know how, ask us. 

Mid-cap Consumer Discretionary: Awesome point. Hedge funds make two-thirds of returns by buying alternative data, populating data warehouses, leveraging trades, loading them up in high-speed systems, and hammering earnings directionally.

If you’re in Consumer Discretionary, Industrials, Communications, Consumer Staples, Real Estate, even Utilities – any industry where the quantitative data on customers, suppliers, prices, demand, supply, abounds – unload the machine gun. Be beta.  If you want to know more, ask us. 

And large cap IROs think everything is awesome, as often rich people do.  They’re benefiting from the waves.  They THINK they’re doing it. But it’s just flows.

What large caps should do is stop wasting money on outreach and start tracking quantitative data for the c-suite and Board. Ninety-eight percent of stock pickers in large caps don’t beat the benchmark, Morningstar says. They are. All. Closet. Indexers.

And investors? You can make 1-2% per day trading Demand/Supply imbalances. For more, try EDGE.

Happy Fourth of July! (Or as my good friend Gary the ex-Brit calls it, Rebellion Day.)

PS – We are gutted by Beryl trashing the Grenadines. We love those islands. We have a 67-foot catamaran there next March. We may have to rethink those plans. Our hearts and prayers go out to our friends in St Vincent and the Grenadines. 

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