EDIT: I know earnings are high, but much of our growth over the last 20 years has been during 2-4% GDP deficit. I don't think that's been priced into the markets. Markets may be assuming that the deficit party will continue.
Per capita or velocity are much more useful metrics.
There's been a huge move into passively managed index funds over the last 10 years, with many smart investors touting them as a better long term bet than actively managed funds.
Passively managed funds don't look at what's coming down the road, they invest to fixed formula.
So where an active fund might predict a fall and get out of equities, all the passively managed money stays put.
Self-fulfilling prophesy as markets are fundamentally about confidence, this shows confidence in the equities markets, despite issues like those in the article.
So the markets continue to rise.
How do you identify an active fund manager that will outperform the market over a long time period?
Do they still outperform the market when you also price in their fees?
Thought experiment: If everyone put money into an index fund that guarantees returns, what is the difference between that and a Ponzi scheme?
Index funds don't have gains because people keep believing the price will increase. They have them because the market as a whole gains in the long run. Index funds lose value during market downturns.
Anyhow, no index fund offers guaranteed returns. These days I only see that from crypto ponzis.
No index fund guarantees returns, so the question is a non-sequitur.
With regard to the question of how does the fund keep value -- the fund holds the equities that are in the index. The equity prices rise and fall with the market, which is hopefully based on the fundamental discounted future value of all cash flows from the company.
what will be interesting is, say there's a genuine market rout (e.g. what happened with Lehmans), which should depress stocks definitely in the sector, but also in the wider market.
If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit?
Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely.
The stocks will still take a hit, as we saw in the case of 2008 almost everyone loses money in a market-wide drop. Many active traders went bankrupt as well, the S&P500 lost 50% of its value but didn't go to 0.
> Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely.
It depends on how quickly the drop happens. S&P500 index funds will sell stocks as they exit the top 500 (this is a simplification of the actual mechanism), so if the drop is gradual then it's not so bad. If the drop is sudden then there is a bigger problem, but the sudden drop is a problem for everyone, active or passive unless you're doing HFT.
One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote.
It's clear that companies are taking a financial hit in several places and will continue to do so (perhaps precipitously if it ends in no deal) however the FTSE100 is current around 1000 points higher than it was a year ago.
That could be because a large percentage of the funds in those stocks are passively managed and therefore don't react particularly to those external events.
Luckily I was able to find an excellent resource that dives into the exact questions we're discussing: https://www.bis.org/publ/qtrpdf/r_qt1803j.htm
It also makes a note that a lot of active investors allocate funds into a weighted index basket to better match index returns, so it could be that both active and passive funds are contributing to the same price insensitivity.
As a final supplemental to the paper given above I also looked at the PE ratio of the S&P500 per year: https://www.multpl.com/s-p-500-pe-ratio/table/by-year
One thing I would also expect is that as passive investing becomes a larger and larger part of the market we should also see the PE ratio rise.
I found a site that gives the PE by year (https://www.multpl.com/s-p-500-pe-ratio/table/by-year) and calculated the following (2019 estimates removed).
For all the years 1871 to present: AVG. 15.7 Median. 14.775 STD Dev. 7.25
For 1980 to present: AVG. 20.72 Median. 18.15 STD Dev. 11.18
PE ratio for 2018 was 24.97, which is very high for all of history but seems reasonable for 1980 to today.
https://www.google.com/search?client=firefox-b-1-d&q=2019+st...
in particular:
"This Stock Market Rally Has Everything, Except Investors" from the NYT.
https://fred.stlouisfed.org/series/LNS12300060
You read too many Clinton-era Arkansas lies. Clinton's racist "discouraged workers" unemployment stats - that only racists quote - says that poor people and minorities don't matter and a lack of jobs for them is their own dang fault, due to a lack of internsl motivation! signed - another Democrat.
LNU05026645 - Discouraged Workers - Has gone up in recent months after having been lower than its been since 2007 for most of 2018.
When unemployment goes up 0.3 points in a month, often continues at that rate for months, sometimes for up to a year. So 4 months of poor performance can undo two years of employment gains, but the poor performance can go on for a year.
[1] http://www.shadowstats.com/alternate_data/unemployment-chart...
The market was also posting all time highs in 2012, 2013, 2014...
If you want a simple proxy, looking at the S&P 500 P/E ratio is a slightly better metric[0].
It's still not the same as explaining the mechanism through which the next recession will occur, but then again if you could explain it a priori, you'd be a billionaire.
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