March 29, 2023

The Trends

Artificial intelligence is all the rage, but you can’t rage against the machines, people. You can only message to them. 

That’s not quite how the ModernIR team phrased it at our webinar, Messaging to Machines, yesterday, but here’s a replay.  Great job by the team, solid turnout for the event.

And it gets to something I’ve admittedly fixated on.  Are the board directors and executives of public companies doing ANY research on investment trends?

Photo 182231394 / 500 © Thodonal |

In a sense, they shouldn’t have to.  Investor-relations professionals, bankers, sellside analysts should be doing it.

Again in a sense, the sellside has done it by trying to become investor-relations people.

Used to be, we investor-relations folks wanted to be overpaid sellsiders handing out buy ratings, covering IPOs.  Used to be, 60-70 banks underwrote an initial public offering.

Today, the sellside is a palimpsest of its past, its importance lingering only on CNBC.  There are 3-4 banks backing IPOs. The buyside isn’t using the sellside much save for trade-execution, and nine firms control ninety percent of customer orders.

Quast. I wish you’d stop ranting about the apocalypse for IR. 

I don’t think there’s an existential threat to our profession.  There’s an existential threat to what we define as “investor relations.” 

These slides present the facts on investment trends from the Investment Company Institute, Morningstar and others.

Every industry knows its trends. Ours needs to know these.  They cut to the quick of how we spend time and money.

I’ll summarize.  Stock picking is in steep secular decline.  Less than 30% of stock-pickers, considerably less for large caps, beat the Passive benchmark. That means more than 70% of stock-pickers aren’t raising new money to invest. They’re net sellers.

Statistically, we’re trooping our execs around to see investors who are sellers, not buyers.

We could stick fingers in our ears, go “la la la,” keep doing what we’ve always done.

Not a good strategy.  We should be tracking the trends and communicating them internally so boards and execs know what drives shareholder value.

Back to where we started, the largest demographic in the market is machines.  Machines make buy/sell decisions with software, artificial intelligence.  They’re over 50% of market volume.  Yes, they amplify other behaviors but they’re also a standalone force.

Passive Large Cap Blend is the largest investment category now, with more than 40% of all equity assets.  There are 500 large caps in the Wilshire 5000, about 300 midcaps.  And 2,800 smallcaps and microcaps comprising 5% of market cap.

The Russell 1000 is 95% of US market cap.

Why doesn’t every public company know that?  Why doesn’t every pre-IPO stock?

Unless you go public with more than $5 billion of market cap, you’re trading the efficient private market for the wild inefficiency of machine-fed arbitrage in the public market.

The exchanges and bankers don’t share these data with you.

The $16 trillion benchmarked to the S&P 500, futures for which expire Friday as they do the last trading day of every month, don’t care about business performance. They need a liquid, big product called “stocks” to which to allocate 30-70% of target-date assets.

The job of IR now? Educating the board and c-suite with regular data on what drives shareholder value. Advising them on the Passive characteristics that attract the most money and recommending a plan for allocating shareholder capital that moves the company that direction.

And every company should have a plan for getting into the Russell 1000, which is size and liquidity, the things Passive money needs.

And part of the IR job is messaging to machines because machines are the biggest consumer group.

And yes, IR is telling the story.  But that’s just one of the tasks, not the job.

It’s also part of the job to know what the money is doing in the market.  Have bank fears eased? 

To answer, let’s look at Financials (which anyone can do with our decision-support platform for traders).

Demand among the roughly 530 sector components averages 4.0/10.0. That level must be over 5.0 for stocks to consistently rise. Passive Investment leads as it does every one of the eleven GICS sectors. That’s quarter-end index-tracking.  Not rational thought.

Short Volume – the market’s supply chain – is 51.1% in Financials.

So, no. Bank fears have not eased.

Financials, Healthcare, Technology, Communications Services, Consumer Discretionary are about 75% of total market cap.  Tech, Comm Svcs, are strongest, 6.0/10.0, 48-49% short.

Tech is up about 16% YTD, Comm Svcs, 17%, Discretionary, 9.8%. It means the money went into Passive Large Cap Blend. Exactly as the trend signals.

YTD in 2023, 12% of SPY volume is Active money, 26% is Passive, 19% is options and futures, and 44% is machines. It’s up about 3.5%.

Passive money is 25% higher per day in SPY than in underlying stocks (10% Active, 20% Passive, 52% machines, 18% derivatives).

Knowing what the money is doing is the essence of the IR job. We sure don’t want our boards and execs to learn these statistics some other way than from us. That would be an existential threat.  Holler, and we’ll help.

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