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Unlike passive investors, who buy at any price, active managers police markets to drive price discovery. But the active police has been defunded.
Apple’s stock is up more than 20% since the market peak in February. Apple, the company, is worse off due to the crisis and global recession. Revenue and earnings will be inferior to what Wall Street had forecast. But valuations, shown below, are astronomical.
Who is paying a higher price for Apple with the promise of less?
Let me be more direct. Why do investors prefer stocks based on the size of the company versus its valuation?
The popularity of passive investment strategies has grown markedly over the last 30 years. Throughout the period, those strategies have increasingly become a more significant factor in asset pricing.
Passive investors have become the marginal investor, also known as the “price setter.”
Passive investors are the driver of recent inane market behavior.
For more background on passive strategies, please read my articles Passive Negligence and Passive Negligence Part 2.
Market-cap versus equally weighted
The rally from the March lows has been odd. Big-tech companies have carried the water, but at times bankrupted companies and the hardest-hit sectors, such as airlines and cruise lines, have gapped higher without apparent reason. Sector rotation has been fast and furious.
One of the more consistent trends has been a preference for the largest companies by market cap.
The graph below compares the equal-weighted S&P 500 (blue) to the market-weighted S&P 500 (orange).
Read the full article here by Michael Lebowitz, Advisor Perspectives
