The market isn’t really the market.
Yesterday, I told Diane King Hall on Schwab Network that futures are no crystal ball. Cracked myself up with that. I meant signals from futures contracts for benchmarks like the S&P 500 often are wrong.
Why is that? I’ll tell you at the end.
Here’s what I mean about “the market isn’t the market.” We rely on the S&P 500 as a benchmark. It’s a broad one, covering 90% of market cap.
But the SPX, the index, is a futures contract. Not 500 stocks. Whatever it’s measuring, it’s up about 11.5% the past twelve months.
Add all the prices of S&P 500 stocks up and divide by 500-ish and you get $229 and change. A year ago it was around $220. A gain of about 4.5%.
Wait, what?
Yes, the index is up over 250% more than the stocks comprising it. As my wife Karen observed, “Whatever it is then, it’s not really the S&P 500.”
What then is the S&P 500 benchmarking? The performance of something that’s up about 11.5% the past year, over 16% year-to-date.
Some kind of sampling is occurring. We run model portfolios at Market Structure EDGE designed for retail investors. Just five stocks and the math signals daily what to do (data, not advice!).
Our Focus Low Volatility model was up 69.8% YTD on November 25. As of yesterday, it’s up 60.6% vs 16.4% for SPY, our market proxy. But if you started using it Nov 25, you’re down 10% while the S&P 500 – whatever that is – is about flat, maybe up 0.7%.
The problem with the Dow Industrials is it’s 30 stocks. Not a broad measure. We can run a basket of large stocks – just five – that rose 20% from Aug 1-Dec 9, versus 9.9% for SPY, our comparative.
But we’re not claiming to represent 30 stocks or 500 stocks. We’ve got five.
Should we call it the S&P 25 then? Because it’s unequivocally NOT the performance of the 500 or so stocks in the index. And is it even narrower than the DJIA?
No wonder nobody beats the benchmark. I think we all, investors and public companies, deserve an answer.
Because it’s what the money is doing – modeling, sampling, benchmarking (owning futures contracts?). Most of the money, more than 60% of all assets under management now, and if you throw in the closet-indexers pretending to pick stocks but buying top Passive holdings, it’s 75%, is not after alpha but beta.
Who cares? Well, it gets to our favorite topic for public companies: A strategy for attracting and keeping Passive money. To do that, you need to be beta – the performance of the stock market.
A defining feature of the SPX (and SPY tracking it) is the absence of volatility. The basket of 500 stocks is 2.5% volatile daily. The index and SPY are 1%.
Lesson, public companies? Reduce volatility, stay in the sample, attract more money. Being the herd is a lot easier to achieve (and less risky). And it delivers returns for shareholders because it’s attractive to Blackrock, Vanguard, State Street.
Your CEO can have his cake and eat it too. Run a great business. But tell the market in a way that keeps you in the herd, not out there with wild volatility, set upon by hyenas. If you want to know how, hire us.
You might say, “This vast concentration of assets at firms running models isn’t good for markets, so we target Active money to offset it.”
Is that money a buyer? (Concentration will indeed be a risk but only when the inevitable day arrives that somebody sells.)
I talked with the IR guy for a large technology company. He said there were 1,500 people at the UBS conference. They meet with hundreds of investors everywhere they go. He’s got interest all over the planet.
I said, “Who are your top holders?” I showed him the data.
Three of them are Citadel, Susquehanna and Jane Street. Of the top 20, 19 were Passives or these three with investment horizons of 400 milliseconds. The one stock-picker in that 20 was a seller in the quarter.
Blackrock, Vanguard, State Street, Morgan Stanley, Geode. Number six was Jane Street. This company’s got $90 billion of market cap.
Whatever all those people at UBS are doing, they’re not big buyers (I think they attend to gin up 28(e) Safe Harbor expenses to pass on to clients).
There’s a lot of this disconnect occurring in the IR world. A whole lot of activity geared to an audience that’s falling further down the ranks of holders all the time.
Tell the story! But what do you tell your c-suite when they look at your 13Fs?
Have a Passive Strategy. Get in that statistical sample and stay there. If you’re an S&P 500 member, your IR strategy should principally be a plan for leveraging it, not differentiating yourself from it (ask and I’ll explain).
And that’s my last message of the year. Happiest holidays, merriest Christmas! We’ll see you in 2026.
And the answer to why premarket futures are poor predicters? Machines with investment horizons of 400 milliseconds set the prices. The signal is good for only that long.
