January 10, 2024

What’s Real

Total nonfarm payroll employment increased by 216,000 in December.

So said the headline from the Bureau of Labor Statistics in its monthly report on jobs in the USA.  These figures are often revised after the fact by 50%, as happened in the trailing two months (of what value is data that’s revised 50%? Anyway.).  In the same news release, in fact the first table listed, jobs declined from November by almost 700,000.

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Illustration 4397737 © Zeelias65 | Dreamstime.com

It’s the difference between the so-called “Establishment” survey of business payrolls and what’s called the “Household” one that samples individuals to see if they’re working.

We’ll skip the details. I’m not writing about jobs or the absence of them. The point is the way data changes your view. Some of the pols are vexed by how people aren’t crediting them for a strong economy. Maybe the people feel more like the Household than the Establishment.

Which brings us to the investor-relations profession to which I’ve belong for nearly 30 years. If all you see are the Establishment data, you’re holding analyst days, trying to differentiate your investment thesis with every earnings release, courting the sellside, trying to target investors.

You might be thinking, “Well. Yeah. Isn’t that the job?”

That’s the establishment view.  So to speak.  It tends not to change much, which means it may be out of step with reality.

What’s the most popular thing institutional investors are buying?  No, not TSLA. I mean, sure, Tesla. But that says TSLA is a story.  If you listen to the establishment all day on CNBC, you’d think the only motivation factor in the market is the Story.  Whosever it is.

But when you look at the data on institutional investment, you see that the money is Passive Large Cap Blend.  That’s nearly half of all institutional assets.

Most of the market’s volume and market capitalization – over 80% of each – is in the S&P 500.  Because it’s a PRODUCT.

Put another way, if one takes a household view of the stock market, it’s a product marketplace, not a story marketplace. 

One of the first things you learn in sales (I’m at heart a sales guy) is: Know your market.  Yes, know the product you’re selling too!  That’s a given. But you have to know what your customers are buying.

CNBC wouldn’t have much material for filling the 24-hour news cycle if it threw in with Blackrock and turned stories into products.  The customers of CNBC – I’m one! – use it for business news.

I question whether they use it for investment because investing in stories doesn’t work.  As Apollo Management’s Marc Rowan said, we’re all leveraged to five growth stocks and the Federal Reserve. You can buy beta – the market’s performance – for about six basis points, he said.

In fact, I was just looking at the products ModernIR’s 401k program offers. Among the best performers is a basic S&P 500 blend fund, meaning it’s value and growth, both. Exactly like half the assets out there. 

The cost is about six basis points.

We look at lots of investing options.  Unless they’re demonstrably superior to buying beta, why do it? You’ll be overpaying and underperforming.  Of course, that’s the economic mantra of the era. More for less.

I digress.

There’s a NIRI (IR industry professional association) chapter program on data-driven storytelling. I applaud data.  But it’s almost oxymoronic.  IR should be data-driven!  But money isn’t buying story.

“Tim. All the people we’re talking to buy stories.” 

True, yes. But the alpha-as-objective constituency doesn’t have the horsepower to compete with beta. Translating, there aren’t enough investable assets that are actively managed and hoping to beat the market to actually succeed at beating the market. 

How can you tell? Because 80% of volume and roughly 85% of assets are just tracking the S&P 500.

Ramifications?  As an investor, pay your six basis points and buy beta. The S&P 500.  The likelihood you can outperform it by picking stocks is about 1%. You need to know probabilities.

If you want alpha, trade short-term.

And public companies?  Be beta. Know your characteristics. Put them in your boilerplate. Let machines do their thing.

For active money, know the performance of the funds you meet. Know if they’re larger or smaller now than they were five years ago, and if they’re larger, is it just because they’re leveraged to five growth stocks and the Fed, or because they’re superior investors?

And know thyself. Know if you can really, really deliver alpha. Or are you better off pursuing beta where your odds of success are so much higher?

Want to know more?  Let’s talk about rethinking the earnings cycle. It’s all about the data.  You heard it here first. Not from the Establishment.

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