09/12/19 11:10 AM EDT The Most Crowded Trade in Market History? This guest commentary was written by Mike O'Rourke of JonesTrading. It may finally be safe to say that the S&P 500 is officially the most crowded trade in the history of financial markets. Bloombergreported today that according to data compiled by Morningstar, passive assets under management rose to $4.27 Trillion moving ahead of the $4.246 Trillion managed by active managers. While we were likely destined to reach this point eventually, there is little doubt in our mind that a decade of ultra-accommodative monetary policy accelerated the trend. As we noted a couple of weeks ago, the S&P 500 has compounded at nearly 18% per annum since the March 2009 lows. The price appreciation ex-dividends, has been more than 12%, well ahead of the long term average of 6.3% dating back to 1928. Admittedly we are measuring versus a historic low, but most other times long term returns achieved such lofty levels, they were measured against key troughs. For example, the 1997-1998 peaks were measured again the aftermath of the 1987 crash, the 1991 peak measured against the 1981-1982 double dip recession, etc. Regardless, with such remarkable broad market returns over the past decade, passive strategies became magnets for flows. Why would investors even bother with active managers? Historically, the financial markets had some connection to economies and business. Active managers offered different alternatives for investors to position for different parts of the cycle. Active managers also represented the opportunity to find hidden gems whose values would eventually be recognized by markets. Over the past decade, central banks have made it their mission to use asset purchases to buttress financial markets, especially equities. Although most central banks did not purchase equities, equity weakness elicited a policy response. We are living in such an era right now. The S&P 500’s 6.2% decline last year prompted the FOMC to reverse policy and start easing in an economy with 5 decades low Unemployment and GDP growing 60 basis points faster than the FOMC’s own foretasted long run potential. Needless to say, if the central bank is continually responding to any weakness in the S&P 500, owning the S&P 500 has a large probability of becoming the most crowded trade in history. If there is any doubt that this is the most crowded trade, just look at the S&P 500’s annual cumulative advance decline for this year. The trade war escalated to new heights and earnings have disappointed since Q3 of last year. These headwinds should impact stocks, instead, the cumulative advance decline this year is stronger than any year since 1997. While it has served investors well (as it grew to essentially be the largest position in the market), one must recognize it is a flow driven trade. Investors need to recognize a flow driven trade cannot be the largest position in the market without significantly dislocating the market pricing mechanism. This is yet another example of central banks being ignorant of the unintended consequences of their activist policies. EDITOR'S NOTE This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading,where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye. https://app.hedgeye.com/insights/77711-why-is-the-s-p-500-so-crowded?type=guest-contributors
what strange report. I'd expect the writer to present it in pareto and show how S&P compare with other exchanges products say Zhengzhou Rapeseed, Dailian China soymeal, CBOT corn futures etc etc
%% Good thing about trends, no matter how much anyone studies trends- trends can easy do much more. SPY volume is about average past 52 weeks; doesnt look crowded @ all on the charts. a good trend can easy get much more crowded/more trendy.NOT a prediction.
Why shouldn't it be crowded? If there was ever any doubt about the "Fed put", or that the only thing which really matters to central banks is whether SPX is falling or stable / rising, it will be removed next week when the Fed cuts rates despite above-trend GDP growth, historically low unemployment, historically easy financial conditions, and core CPI meaningfully higher than the Fed's ostensible 2% target. Unless you are trading on short time frames of hours/days to a few weeks, it's insane to fight it. There was lots of money to be made this year on bonds and PMs, by fading those who for some reason thought the Fed would remain hawkish even in the face of a plunging stock index. In the future there will be lots of money to be made fading those who think stocks are a can't-lose one-way bet, but by my reckoning we're a ways off from that.
Well, volume average doesn't mean not crowded. Us mom and pop buying SP500 index not to trade but to collect. We sit on it.
%% OK, then how are you measuring crowded?? SPY + QQQ are excellent uptrends; TSLA is down negative- 26% YTD. NOT a prediction + sure not a stock tip.LOL