From Lance Roberts at RIA:
While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall the previously “passive indexer” becomes an “active panic seller.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic and damaging ending.
There is a lot to be said for passive investing.
Key Takeaways from Morningstar’s Active/Passive Barometer Report:
Prof. Burton Malkiel, author of A Random Walk Dow Wall Street, writes in the WSJ:
During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&P 500 large-capital index. When S&P measured performance over a longer period, the results got worse. More than 90% of active manager underperformed their benchmark indexes of a 15-year period.
…..In 2016 investors pulled $340 billion out of actively managed funds and invested more than $500 billion in index funds. The same trends continued in 2017, and index funds now account for about 35% of total equity fund investments.
Volatility is also near record lows as the market grows less reactive to short-term events.
Lower fees and lower volatility should both improve investment performance, so what could possibly go wrong?
Investors could stop thinking.
If passive funds are the investment of choice, then new money will unquestioningly flow to these funds. In turn the funds will purchase more of the stocks that make up the index.
Prices of investment-grade stocks that make up the major indices are being driven higher, without consideration as to whether earnings are growing apace.
And the higher index values climb, the more investment flows they will attract. Driving prices even higher in relation to earnings.
More adventurous (some would say foolhardy) investors may even start using leverage to enhance their returns, reasoning that low volatility reduces their risk.
The danger is that this becomes a self-reinforcing cycle, with higher prices attracting more investment. When that happens the market is in trouble. Headed for a blow-off.
Investing in passive funds doesn’t mean you can stop thinking.
Don’t lose sight of earnings.
When prices run ahead of earnings, don’t let your profits blind you to the risks.
And start thinking more about protecting your capital.
WASHINGTON—The Trump administration proposed a wide-ranging rethink of the rules governing the U.S. financial sector in a report that makes scores of recommendations that have been on the banking industry’s wish list for years.
….If Mr. Trump’s regulatory appointees eventually implement them, the recommendations would neuter or pare back restrictions from the Obama administration, which argued the rules were necessary to guard against excessive risk taking and a repeat of the 2008 financial crisis.
Seems to me like the exact opposite of ‘draining the swamp’. The new administration proposes removing or limiting the rules intended to reduce risk-taking in the financial sector.
This could end badly.
Especially with bank capital at current low levels.
Source: Trump Team Proposes Broad Rethink of Financial Rulebook – WSJ
Nymex Light Crude is testing support at $45/barrel. Breach would offer an immediate target of $40. Follow-through below $40 would signal another test of the 2008/2016 lows at $30.
The chart below plots long-term crude prices adjusted for inflation. Recent falls show real crude prices returning to their previous trading range (0.1 to 0.2) before the 2004 to 2015 “China boom”.
The 2004 to 2015 surge in crude prices is very likely a major cause of low global growth over the last decade. Return to the previous trading range would be a bullish sign for the global economy.
Growth of total hours worked, calculated as Total Nonfarm Payroll multiplied by Average Hours worked, improved to 1.575% for the 12 months to May 2017.
And the April 2017 Leading Index, produced the Philadelphia Fed, is tracking at a healthy 1.64%. Decline below 1.0% is often an early warning of a slow-down; below 0.5% is more urgent.
Dow Jones Industrial Average continues to advance. Rising troughs on Twiggs Money Flow signal long-term buying pressure.
Dow Jones Transportation Average is slower, headed for a test of resistance at 9500. But recent breakout of Fedex above $200 is an encouraging sign and the index is likely to follow.
We are in stage III of a bull market, but this can last for several years.
Falling wage rate growth suggests that we are headed for a period of low growth in employment and personal consumption.
The impact is already evident in the Retail sector.
The RBA would normally intervene to stimulate investment and employment but its hands are tied. Lowering interest rates would aggravate the housing bubble. Household debt is already precariously high in relation to disposable income.
Like Mister Micawber in David Copperfield, we are waiting in the hope that something turns up to rescue us from our predicament. It’s not a good situation to be in. If something bad turns up and the RBA is low on ammunition.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored….
~ Mr. Micawber in Charles Dickens’ David Copperfield
Last week I wrote: “I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.” This week the ticker tape backs up my bearish sentiment, so I am a lot more comfortable.
Iron ore continues to fall, headed for a test of 50.
Banks’ bear market rally also petered out, with the ASX 300 Banks index headed for a test of support at 8000. Breach would confirm the primary down-trend.
The ASX 200 broke support at 5700. Declining Twiggs Money Flow signals selling pressure. Breach of primary support at 5600 would warn of a primary down-trend.
“Never trade against the central bank” is a golden rule of trading. Rule #2 should be: “When the central bank behaves erratically, stay clear.” The PBOC announced a crackdown on wealth management products in May but alarm at the rapid contraction elicited a quick retraction.
The Shanghai Composite Index broke support at 3050/3100 signaling a primary decline. But the PBOCs sudden reversal spurred a recovery, with the index now likely to test resistance at 3300. Rising Twiggs Money Flow indicates buying pressure. Reversal below 3050 is unlikely but would confirm a primary down-trend.
India’s Sensex is consolidating above its new (medium-term) support level at 31000. Bearish divergence on Twiggs Money Flow indicates medium-term selling pressure. Target for the advance is 32000* but further testing of the new support level is likely.
* Target: 29000 + ( 29000 – 26000 ) = 32000
Political uncertainty, with a hung parliament, increased downward pressure on Sterling which is testing primary support at 1.13/1.14 against the Euro. Breach would signal a test of the 2016 low at 1.10.
The FTSE 100 stalled at 7600, with bearish divergence on Twiggs Money Flow indicating medium-term selling pressure. Retracement that respects support at 7400 would re-affirm the target of 7700*. But breach of the rising trendline is as likely, which would warn of a test of primary support at 7100.
* Target: 7400 + ( 7400 – 7100 ) = 7700
