Listenening to Michael Green on a recent podcast...he makes an argument that what has been driving the markets is a change in market structure. Meaning fund flows. employment. Weekly contribs to 401k goes into SPY etc thru Vanguard, BlackRock, Fidelity...target date funds, share buy backs. Fundamentals don't matter anymore. Inclusion into SPY does. Most (many?) target dates go something like 80/20 into US/Intl stonks, thus driving SPY higher. Only trouble is what happens when a lagging indicator like emploment (BLS bullshit stats?) go the other way? That's why he like call options. Hmmm.
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Over the years many analysts were wrong in trying to predict FUTURE performance based on earnings, valuation, fundamentals, the economy, inverted yield, inflation, etc.
As a trader, I always kept it simple. I started with 5 funds in 2000 and now just 2-3 funds. I invest in leading wide-range funds based on the markets. If both stocks+bonds don't make sense and especially when I can't find good options I like I stay in MM.
It doesn't matter how many experts predicted that 2023 would be a great year for Value, Energy, Healthcare....and Tech is overvalued. YTD, QQQ made over 30%.
Just several years ago many claimed that Apple is another blue chip company. A 3 chart proved it's not. Apple made more than twice than SPY https://schrts.co/VgvjgSqg
The trouble is that the markets, by and large, have kept moving higher during most of my 75+ year lifetime. Optimists have done much better than pessimists over that time. Sure, there have been setbacks along the way. 2007-09 was miserable. And had you been 100% invested in Japan in the 90s you’d probably be poorer today. (Most of us weren’t 100% invested in Japan.)
There’s just too many unknowns to predict how various markets will perform year to year or decades out. So the target-date (structured / programmed inflows) are a part of the picture. But they’re not the entire story. I’ve always felt that given enough time all paper curriencies depreciate in value. Makes me want to invest in good businesses, real estate, metals, infrastructure - just about anything other than paper.
Allocation to large-cap / S&P stocks should be / would be expected to be higher if investors’ time horizons are longer. Heck, with a 50 year time horizon that type concentration may be desirable. As retirement draws nearer the target date funds I’m familiar with reign in that risk. Checked TRP’s 2025 retirement fund (TRRHX) and find it just a tad over 30% invested in U.S. large cap stocks. Last time I looked at the average 401K / retirement fund balances for U.S. workers, those averages were pathetically low. We are to believe these same savers have propelled U.S. equity markets into the stratosphere?
What drives equity markets over the shorter run - day to day, month to month? In other words, what causes some stocks to move up or down unpredictably? Don’t know. Not strictly fundamentals because they rarely change so rapidly. I’d guess computer driven programmed buying and selling is one actor. Also, hedge fund managers trying to get a leg up on the next one (or a leg down if selling something short). Also reaction to bits and pieces of macro news as they emerge. (This week it may be the FOMC minutes which get published.) The sheer size of some funds like PRWCX (and now its cousin TCAF) may be partially responsible. Even very small (as a % of holdings) buys / sells of their enormous holdings may be large enough to send vibrations through equity markets for weeks on end as, it’s likely they try to stagger these buy / sell orders over time to try and minimize the impact. And what do you think happens when Buffet sells off a holding or adds a new one?
I requested the youngin' 'splain, you know, WHY it increased.
He replied, in writing, "Because the numerator increased more than the denominator."
Wow! Or, as Monty Python might have sarcastically said, "Brilliant!"
Similarly, one poster has once again trotted out his standard, sophomoric response of "more buyers than sellers."
Um, yeah, that's an effect, not a cause.
Similar to what I asked the youngin', the next question would of course, um, duh, be,
"WHY are there more buyers than sellers?"
This year, currently, sentiment is widely cited as the primary market driver.
https://markets.businessinsider.com/news/stocks/art-cashin-stock-market-rally-fomo-sentiment-bump-landmine-2023-6
Specifically, sentiment about the future of rates, the probability of a recession, and the biggie, FOMO on the AI play.
https://markets.businessinsider.com/news/stocks/recession-stock-market-crash-ai-chatgpt-hsbc-mid-year-outlook-2023-7
As a side note, I thought this was relevant in today's world, Mr Green was asked about Gold, the value of it, his answer Gold = 1/n where n is the confidence in central banks globally...and the topper...."I want something that I can throw at the Zombies when they come after me..."
@Baseball_Fan -
dThat sounds a lot like a theory I’ve heard on other forum(s) to explain why equities have risen this year. Can’t blame folks who missed the 6+ month rally to try and rationalize how they got left behind. And the theory (that passive inflows are driving the market) might in the end prove correct. Darned if I know. But let’s look at that statement you cite ….
Re: ”90%+ of those under 45 years old who have a 401k account, auto invest into index funds…”
That could well be true if it means a portion of their automatic investment goes into index funds. That relates to target date funds being the default option where they work plus the fact that nearly all target date funds do invest a portion of their assets in the S&P. It does not mean that 90%+ of those under 45 invest exclusively in the S&P. I and a number of others have cited figures as to the % those target date funds allocate to large cap U.S. stocks. Nowhere near 90%.
There’s another flaw in the quote you cite. Even were it accurate (as you interpret it), it still would not mean that 90% of all 401K contributions go into index funds. That would depend on who that 90% were and how much they were able to contribute.
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PS: Not my role to assess market valuations or recommend what people should own. I will submit however, that if a bubble existed the S&P, NASDAQ, or other major major U.S. index, opportunities could still exist in smaller or mid cap equities as well in some foreign markets. And, an index is not a market. It merely seeks to replicate one.