There’s an air of inevitability in the stock market.
We have wars and rumors of wars and stocks rise, and then a ceasefire and stocks skyrocket. It’s nice in the sense that a relentlessly yeasty market creates wealth.
Moviemaker Stanley Kubrick recrafted Peter George’s 1958 novel Red Alert about a daft general who tries to bomb the Soviet Union into a satirical comedy about the inevitability of doom called Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb.
Messages of doom don’t inspire the masses. Comedy does.
Stocks have rallied at least two percent in two days on a ragged cessation of hostilities in the Mideast. As bombs were raining and sirens were screaming and one wondered what Iran would do, stocks waited.
War stopped and stocks jumped. It’s, well…strange stock love. Data show selling by indexes and ETFs with quarterly rebalances June 20. Passive money rose nearly 150% day-over-day as stocks retreated.
Yet not even a negative rebalance waylaid stocks. Since Apr 21 (through Jun 24), the stock market has averaged 6.1 on our 10-point scale of Demand that we call Market Structure Sentiment. Way good. Redlining.
No matter what, stuff rises.
How? My Dr. Strangelove thesis on inevitability is that Exchange Traded Funds reached a “tipping point,” a critical mass on the scales.
Stocks can trade at seven times earnings or 50 times earnings. What difference does it make to ETFs? None. Bombs fall. Bombs stop falling. The number of ETF shares increases, the supply of stocks underpinning them decreases.
Does it make any difference if we impose tariffs or don’t? If we add jobs or lose them? Blow the budget or cut spending? Drown in debt, change taxes, import less, export more, reduce interest rates or raise them, have inflation or deflation?
Do fundamentals matter? There are companies making money hand over fist with terrible multiples, others blowing capital-expenditure budgets like 1999 that are worth more than the Russell 2000.
By the way, Russell indices reconstitute for a final annual time this Friday. Next year it’ll be twice, in June and November. It’s too big to do once. ETFs need size.
So, where was the tipping point?
Let’s use the dollar to illustrate. On Apr 5, 1933, President Franklin Roosevelt issued Executive Order 6102 outlawing gold as money. Never mind that he contradicted the Constitution. He apparently didn’t know Gresham’s Law. Bad money chases out good.
Like this: Devalue the currency, and people will hoard assets. That’s what’s happening in equities.
Follow me.
President Lyndon B. Johnson eliminated silver from money with the Coinage Act of 1965, devaluing the currency. Ironically, the Coinage Act of 1792 made it a death penalty felony to willfully devalue the currency. LBJ lived.
President Nixon cut the currency loose from gold in 1972 and it’s been a balloon in the wind since.
ETFs force people to hoard stocks because they are gold and ETFs are the balloon. What comes next? Do we outlaw stocks? Force everybody to own ETFs?
All currencies behave the same way. As do elements of market structure. Volatility, trades per day, shares per trade, volume, all behave the same way. The algorithmic nature of the market.
There was a regime in the stock market from mid-2017 to the Pandemic typified by muted change to investment patterns. The Pandemic changed Everything. ETFs exploded. That was our Strangelove moment, our Rooseveltian executive order.
Funny thing. Strip out price as distortion and the PATTERNS behind stocks are the same from March 2020 to Dec 2022. Got that? A massive bull market and the only bear market since. Same behavior. Bad money chased out good.
Patterns in 2023 are also distinct, though prices behaved the same as they did in 2024. The 2023 data are characterized by extreme levels of Passive Investment. Since then, even as stocks have moved wildly, patterns have been stable: Light Active money, lower Risk Mgmt, lower Passive money, higher Fast Trading.
It’s statistical. But it explains what’s occurring. Money runs in swaths driven by investment trends and patterns. It’s why the market seems inured to economics. And why Trump posts on Truth Social can gyrate equities.
Investment flows follow long-range schemes. Machines read prices and news and react.
And THAT, my friends, is how you get a market unresponsive to fundamentals, macroeconomics, geopolitics. Machines set prices. Passive money (ETFs) hangs around midpoint prices. Risk is loosely managed because models don’t see much. Active money fades.
And so? Stocks are good until Passives (ETFs) stop committing to the middle and Fast Traders cease setting prices. Then, look out. Equal, and offsetting like 2020 and 2022.
When? Maybe never. Dr. Strangelove would advise us to stop worrying. But Dr. Strangelove thought doom was inevitable. The author of Red Alert committed suicide. I think we still need common sense. Anything that behaves in ways it shouldn’t deserves skepticism. Good naturedly.
Want to know what’s next? Issuers, use our analytics. Investors, try EDGE (issuers, you can use it too, for market intelligence!).
