Running_Man
Thinks s/he gets paid by the post
- Joined
- Sep 25, 2006
- Messages
- 2,844
I have come to believe that the stock market is set to soar to unbelievable heights over the coming 2-5 years, ending with the S&P 500 somewhere around the 12,000 range. This has come to me after ruminating and watching multiple times a Mike Green one hour video which paradoxically was titled "The trouble with Passive Investing". After contemplating what he was stating was happening in the market and confirming the trends he spoke of are true I have the following conclusions:
1) Since 2002, passive investing has been outpacing active investing in terms of total market share of the stock market universe. This means on balance active investors have been selling to passive investors and active investors have been leaving the market.
2) Passive investors, for a large majority, means there is no analysis done on individual companies to determine the value needed, a formula is adopted by passive funds - do I have cash I buy stocks or do I need cash I sell stocks. Active funds held cash reserves to be utilized when prices reached what was felt by the investor to be a good price to purchase stocks. A very large indicator of how this is occurring is in the European government debt with negative interest rates. The largest holders are United States passive index funds, who are forced to buy more of the bonds as the government purchases the bonds to drive down their interest rate and increase the price and as the market capitalization of the negative debt is increasing at the fastest rate, this leads to a greater weighting in the global bond indexes leading to a feedback loop. The negative rates of course do lead to some selling as the bonds don't yield enough and drive more funds into passive stock investments.
3) Active investors leave the market as when they feel values are too high they hold more cash and then under perform passive investing by ever great amounts, exacerbated by the ZIRP conditions leading to zero returns on their cash while passive indexes soar. Since 2011 this is leading to a hockey stick curve in the percentage of the market that passive investing controls. Presently about 90 percent of all transactions and 38 percent of the holders of equity capitalization. There has been an explosive increase in passive holdings over the past 8 years
4) This means as passive funds continue to receive funds they must buy the index whatever the level of the index, and the reduced pool of active investors is lessening the pool from which to buy the stock. This effect is clear to see on the S&P 500 which has now had 4 days in the last 2 years where every stock in the S&P 500 traded in the same direction something that has never happened.
5) Older investors are far more likely to hold active funds and investors younger than 30 hold nearly 90 percent of their equity in passive funds. So the trend of passive investing is only going to increase, leading to wider price gains in order to break investors hold of their stocks. SO over the next 2 years passive will surpass the holdings of funds in the market to over 50%, further reducing the supply from active investors. And the passive indexes will most likely be performing far better than active managers and confirm in investors minds the need for passive investing.
6) Equity holdings as a percentage of a portfolio is also growing leading to more money being invested in the market and as passive investing will be driving up the indexes price moves will become more and more rapid.
7) Once the passive market achieves more than 50% of the market, the lack of active managers is going to increasingly reduce the liquidity to the market and move will become explosive, by the end 10-20 percent increase in a month will be seen. I expect something along the lines of a 30-35 percent gain followed by a 35-40 percent gain followed by a 90-100 percent gain will occur in stocks.
IF this occurs the truly difficult thing to do is to sell before the end of the bull market, because once the selling begins there is no value hunters to absorb the supply but that is a discussion for the future. The alternative view that the passive investing tipping point causes an immediate decline seems incredibly unlikely as the Federal Reserve seems clearly interested in maintaining stock market increases in fixing the problem with pension funding and hoping to proved some inflation to offset other debt problems.
If this occurs the best investment should be the S&P 500 as index funds invest more in the largest capital items and S&P 500 companies make up a larger market cap of most indexes. But all the indexes should see large positive moves.
1) Since 2002, passive investing has been outpacing active investing in terms of total market share of the stock market universe. This means on balance active investors have been selling to passive investors and active investors have been leaving the market.
2) Passive investors, for a large majority, means there is no analysis done on individual companies to determine the value needed, a formula is adopted by passive funds - do I have cash I buy stocks or do I need cash I sell stocks. Active funds held cash reserves to be utilized when prices reached what was felt by the investor to be a good price to purchase stocks. A very large indicator of how this is occurring is in the European government debt with negative interest rates. The largest holders are United States passive index funds, who are forced to buy more of the bonds as the government purchases the bonds to drive down their interest rate and increase the price and as the market capitalization of the negative debt is increasing at the fastest rate, this leads to a greater weighting in the global bond indexes leading to a feedback loop. The negative rates of course do lead to some selling as the bonds don't yield enough and drive more funds into passive stock investments.
3) Active investors leave the market as when they feel values are too high they hold more cash and then under perform passive investing by ever great amounts, exacerbated by the ZIRP conditions leading to zero returns on their cash while passive indexes soar. Since 2011 this is leading to a hockey stick curve in the percentage of the market that passive investing controls. Presently about 90 percent of all transactions and 38 percent of the holders of equity capitalization. There has been an explosive increase in passive holdings over the past 8 years
4) This means as passive funds continue to receive funds they must buy the index whatever the level of the index, and the reduced pool of active investors is lessening the pool from which to buy the stock. This effect is clear to see on the S&P 500 which has now had 4 days in the last 2 years where every stock in the S&P 500 traded in the same direction something that has never happened.
5) Older investors are far more likely to hold active funds and investors younger than 30 hold nearly 90 percent of their equity in passive funds. So the trend of passive investing is only going to increase, leading to wider price gains in order to break investors hold of their stocks. SO over the next 2 years passive will surpass the holdings of funds in the market to over 50%, further reducing the supply from active investors. And the passive indexes will most likely be performing far better than active managers and confirm in investors minds the need for passive investing.
6) Equity holdings as a percentage of a portfolio is also growing leading to more money being invested in the market and as passive investing will be driving up the indexes price moves will become more and more rapid.
7) Once the passive market achieves more than 50% of the market, the lack of active managers is going to increasingly reduce the liquidity to the market and move will become explosive, by the end 10-20 percent increase in a month will be seen. I expect something along the lines of a 30-35 percent gain followed by a 35-40 percent gain followed by a 90-100 percent gain will occur in stocks.
IF this occurs the truly difficult thing to do is to sell before the end of the bull market, because once the selling begins there is no value hunters to absorb the supply but that is a discussion for the future. The alternative view that the passive investing tipping point causes an immediate decline seems incredibly unlikely as the Federal Reserve seems clearly interested in maintaining stock market increases in fixing the problem with pension funding and hoping to proved some inflation to offset other debt problems.
If this occurs the best investment should be the S&P 500 as index funds invest more in the largest capital items and S&P 500 companies make up a larger market cap of most indexes. But all the indexes should see large positive moves.
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