Non-Fundamental(ist) Extremism

Signs of detachment from economic and market fundamentals are piling up. For one, the lack of market volatility is staggering. The S&P 500 just finished its least volatile quarter since 1968 and the NASDAQ 100 posted its most extreme percentage of positive days in a quarter since the inception of the index; it was in positive territory 71% of the days in the first quarter, something that wasn’t even achieved during the Tech Bubble.

Granted the lack of volatility doesn’t necessarily have anything to do with market fundamentals, but when paired with the following observations, it sure makes us feel uncomfortable.

Investors have evidently given up on the idea that investing should be about underlying value. Price discovery, long considered a component of the raison d’etre of markets, is being trampled at the hands of passive investing. As reported by Bloomberg and Ignites:

  • Vanguard hauled in $121 billion in new money during the first quarter, beating its best-ever quarter by 46%. The cash breaks down to $2 billion a day. Extrapolated to the end of the year and would mean $500 billion in sales during 2017, breaking Vanguard’s single-year record of $305 billion. Vanguard is in uncharted territory and may have hit a tipping point. “I think they’re actually overwhelmed at this point,” says Bloomberg’s Eric Balchunas.
    Source: Bloomberg

That sure sounds an awful lot like the situation in the first quarter of 2000, or more correctly, the reverse thereof, when active managers were king. Here is an excerpt from an article entitled “Return of the Stock Pickers”. It’s actually comical to read the following, knowing what came next:

  • Indeed, stock-picking is back in vogue. AMG’s Adler says industry-wide large-cap index funds–mainly S&P 500 funds–are getting only 4% of new cash this year, vs. 42% in ’99. And that’s not all. In four of the past five weeks, more money came out of index funds than went in…No wonder Vanguard Group, the No. 2 fund company and premier purveyor of index funds, is also turning to stock-picking managers for help.
    Source: Bloomberg

Vanguard was adding to their active sub-advisory bench right at the market top, because investor preference for active was so strong. Wow.

Lastly, how about this scary little piece about Chinese investors:

  • Like many individual investors in China, Yang Mo has no idea what’s in the wealth management products that make up a big chunk of her net worth. She says there’s really no point in finding out. Sure, WMPs invest in all kinds of risky assets, but the government would never let a big one fail, she says.

    “It’s not how the Chinese government does things, and it’s not even Chinese culture,” explains Yang, a 29-year-old public relations professional in Beijing.

    Hers is a common refrain in Asia’s largest economy, where savers have poured $9 trillion into WMPs and similar products on the assumption that they’ll get bailed out if the investments sour.
    Source: Bloomberg

“Breathless” seems to be the best adjective to describe investor activity or how I’m feeling at the moment of this writing…but for very different reasons.

Read our related blog, The Asymmetry of our Pricey Stock Market