Market Update: The Tail Is Wagging The Dog

My Comments: After 45 years participating in the markets as an investor and as a Registered Investment Advisor Representative, I’ve become genuinely flummoxed by what we’re seeing almost daily on Wall Street. In my limited frame of reference, it makes no sense.

There are too many previously reliable signals that what we see happening suggests it’s counter-intuitive. There has to be forces at work that have not been there before. The obvious one that comes to mind is the seemingly bottomless liquidity offered by the Federal Reserve. All well and good in the short term but fundamentally flawed if it puts us under the bus in the years to come.

Erik Conley whose ideas you seen me share from time to time has an explanation. Is he right? At this point I have no earthly idea.

by Erik Conley \ 18 JUN 2020 \

The Stats

The total amount of investable wealth in the world is huge – $320 trillion to be exact. This is according to the World Wealth Report assembled by Capgemini (OTCPK:CAPMF) (OTCPK:CGEMY).

Of the $320 trillion invested globally, about 35% is allocated to stocks. (The rest is invested in property, bonds, gold, diamonds, artwork, and other assets that the average investor can’t afford.)

Doing the math, I arrive at total equity invested globally of $86 trillion USD. That’s a lot of money. I’m going to do two things in this article. Thing 1 is that I’m only going to focus on U.S. stock market investments. The data is cleaner and more readily available.

Thing 2 is that I’m going to separate investors into tiers of wealth, because each tier behaves in a different way. This will give us a sense of who is driving the stock market up and down, which is my ultimate goal for this article.

Wealth Tiers and their investing behavior

Tier 1 is comprised of what economists call the “Ultra-High Net Worth Individuals.” To make it into this club you need a minimum of $30 million in investable assets. At last count there were 173,000 members in this highly exclusive club. Their aggregate invested wealth is $56 trillion.

This is where the Forbes list of Billionaires lives. Most of their wealth is invested in property, or their own businesses. Only 27% of their wealth is invested in the stock market, including listed companies, private equity, and hedge funds.

These uber-wealthy investors tend to be slow-moving, not actively trading their stock portfolios. They mostly farm out that task to their private bankers at Goldman (NYSE:GS), JPMorgan (NYSE:JPM), or their Family Office. As slow-moving investors, they are not the primary cause of market ups and downs, irrespective of their great wealth.

Tier 2 is comprised of “Moderately High Net Worth Individuals” – those with $15-30 million of invested assets. They are striving to make it into Tier 1, so they are a little more active than their betters who are already there.

There are roughly 535,000 of these wealthy climbers out there, and their aggregate invested wealth is $47 trillion. These folks haven’t yet made it into the Billionaires club, but they’re trying to get there. They have a higher allocation to equities, 38%, because they understand that stocks represent a faster path to wealth creation than property or bonds.

These folks use the same private bankers at Goldman, JPMorgan, etc. but they are a little more proactive with their asset allocations. Their higher allocation to stocks means that they pay more attention to what’s happening in the market.

But they’re also slow to change, which means that we have to look elsewhere for who is driving this market.

Tier 3 is comprised of “High Net Worth Individuals.” These are folks with invested assets of $5 to $15 million. They have more of their investments in the stock market – 55% – because they understand that the path to greater wealth requires taking more risk.

There are 1.6 million of these investors out there, and they are more active in the stock market than their betters.

Tier 4 is comprised of a cohort that has been called “The Millionaire Next Door.” They have invested wealth of $1-$5 million, and they are active in the stock market. 64% of their money is in equities.

They pay attention to what’s happening in the stock market and they are quick to increase or decrease their equity exposure accordingly.

There are 16 million of these investors, and they control $17 trillion of stock market assets. But they are not the prime movers of the market.

Tier 5 is what economists call the “Mass Affluent.” These are folks with $100,000 to $1 million invested. There are 350 million of them out there, and they control $9.5 trillion in equities. They are very active in the stock market, often going “all in” or “all out.”

But how much influence do these investors have over the direction and level of the market? I would argue that their influence is small. They control $9.5 trillion of equities in a pie that adds up to $80 trillion.

Tier 6 is our last cohort of investors, who have accounts that are less than $100,000, but they have undue influence over the trend and level of the stock market. How? That comes next.

The tail wagging the dog

How can a cohort of relatively small traders who make up about 10% of the market drive prices ever higher when most evidence points to lower prices? I can think of three reasons. Social media, algo shops, and ETFs. Let’s take them one at a time.

Social Media. Hertz (NYSE:HTZ) filed for bankruptcy, but social media posts claimed that this Phoenix would rise from the ashes, and Boom! it went from $0.55 to $5.53 (a 10-bagger) in 9 trading days. How did it get to $5.53? Not by the sheer buying power of the day traders. It got there because the algo traders picked it up and the ETFs did too.

Algo Shops. These are nearly 100% driven by computers. When they catch a rising stock, HTZ or otherwise, these algos are programmed to buy buy buy. On a larger scale, they buy anything and everything that is moving higher. It matters not where the buying is coming from. Up is up, and that means buy.

ETFs. Most ETFs are passively managed. There is $4 trillion of investor money in ETFs. These pooled funds don’t care about fundamentals like valuation or earnings. They only care about one thing – price. As the prices of their holdings increase, the price of the ETF increases accordingly. There is no manager to say “this is nuts, let’s sell the most overvalued holdings.” It’s just buy buy buy.

Final thoughts

The tail that’s wagging the dog is the small investor. Retail types. Day Traders. They are driving the algo traders and the ETFs. These are the folks who believe that the pandemic has been squashed and the economy is opening up. Lord, I wish it were true.


One thought on “Market Update: The Tail Is Wagging The Dog

  1. Tony B

    Well, I’ve only been studying the markets for just over 20 years. As far as i’m concerned…..the market is performing EXACTLY as it has always performed. Unpredictable, volatile, 30% pullbacks every five years, all along its long upward trend since the Buttonwood tree…..Not so sure what is “flummoxing” about it.


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