Trust index funds. They siphon off cash, distribute the money like a weighted stock trampoline, jump in at the moment of decline, seek a place with desperate money and find it in the S&P 500. You can’t see it because it’s hidden behind the transom. The Vanguard S&P 500 ETF alone attracted $71 billion in net inflows in the first nine months of this year, according to Morningstar. This is $20 billion more than the record set by SPDR S&P 500 ETF Trust in 2023. That statistic is remarkable. We don’t think it will be a big boost for the overall stock market. But it’s very important because it has nothing to do with the Federal Reserve, interest rates, or anything else that might normally affect the flow of funds. That includes the upcoming presidential election with two big-spending candidates. One would impose import duties reminiscent of the Smoot-Hawley Tariff Act of 1930, which was enacted in addition to the Fordney-McCumber Tariff of 1922. They used to teach high school students about the harms of tariffs in relation to the Great Depression. Some of the more in-depth research courses from the time say these barriers were the direct cause of the collapse of the entire trade and the failure of ignorant President Herbert Hoover to avoid the worst downtown in our nation’s history. He even claimed that. These have now become a rallying cry for those who cannot understand what happened in our country more than 100 years ago. But this is not the moment when history is accepted. This is the moment when candidates believe they can reverse history. For a time, each country feared Japan’s exports and imposed high tariffs on Japanese products. Our companies responded by switching factories to those with the highest tariffs so that we could reach those markets while avoiding tariffs. Reversing history and reversing time will be difficult, but the xenophobic rallying cry rings true, especially when it comes to demonizing the countries that took our jobs. who knows? It works for the current Department of Commerce which poses a threat to Taiwan and the Formosan Cicada, which is why the huge Arizona Semi-Foundry is currently being built. Maybe this strategy has more promise than I thought. In any case, this is a change in policy for our country, the impact of which is unknown, and for 50% of our country, it is a country that has been hailed as unknown in history. Why do I point this out? Simply to show how oblivious this wave of money is to the fundamentals of markets and companies. But it doesn’t matter. Those who follow Warren Buffett’s teachings only know investing through Pavlovian index funds. The Buffett way is the American way of investing, and it would be almost un-American not to do so. Therefore, this grand tide self-fulfillingly lifts all boats, especially the Magnificent Seven. S&P 500 money is indifferent to stock valuations of any kind and ignorant of upgrades and downgrades. It is difficult to maintain a blue-chip stock when inflows exceed outflows. Lilliputian sellers are usually unable to do damage if they match oblivion index money. This money doesn’t know much about history. What a wonderfully bullish world this is! Somewhat shockingly, this money washes away all of the Fed’s obsessions. It doesn’t matter what Fed Chairman Jerome Powell does, whether it’s a quarter-point cut or a half-point cut. We talk about it as if it all matters. But the fact that we haven’t had a down week in the six years since the two rate cuts explains a lot about why we continue to have money flowing in. 4% two-year bonds are not competitive with the S&P magnet. 500 and its relatives. What is the role of earnings with his very bullish background? Strangely positive. We started with banks and the numbers were so good that Active Money found a home at 14x earnings and even an anchor in Wells Fargo at 11x earnings. Have charitable trusts gotten lucky? No, it’s just that active money has chosen to focus on esoteric net interest income numbers, and Wells CEO Charlie Scharf is ahead of other banks in realizing that obsession. He noticed the idea and used it with such precision that he changed his perception on the spot. Wells could rise further to join the board of banks trading at 14 times earnings. Hence, its impressive performance since its early set of earnings numbers. Given the S&P 500’s 21x PE multiple, higher prices could be justified for banks. A cynic might say something else: the S&P 500’s multiple is too high, so banks shouldn’t rise that much. But you need to know how to read bull markets. Banks buy back large amounts of stock. Charlie Scharf has been buying back a lot of stock, 6% this year alone, and will likely buy back more. Why not? His stock price has finally returned to where it was in early 2018, when the Fed first imposed dire asset limits on Wells. What does it mean when there is no asset limit? It wasn’t really clear what that meant, although the question was asked in various forms on the company’s post-earnings conference call. Whatever it is, we’re most likely going to see more financing, which is positive. I have no intention of continuing to live in Charlie’s house. I was shocked that Morgan Stanley could do much better under CEO Ted Pick than it did under James Gorman. Decent investment banking with no mistakes on any line and only getting better as interest rates drop. This 3% yield remains attractive. I’m waiting for someone at this bank to explain their strategy or tactics for electronic trading. For now, it seems like triple AAA Robin Hood and no more. That was a shame, because I thought there would be younger traders who could become Morgan Stanley’s bigger clients as they get older. Maybe Pick can do it for you? Perhaps Pick could at least outline the strategy? It’s rather unusual that this company doesn’t have grand plans. If management did that, they would at least get an even higher P/E ratio. The rise in Robinhood stock should be enough to make Morgan Stanley jealous. Consider how Schwab crept across the industry in the ’90s. It’s happening again. The index fund cushion promotes equal opportunity. On Friday, Procter & Gamble reported a lackluster quarter, with its beauty division really disappointing. Now, that didn’t include the Chinese shocker, but the company did pursue China’s woes pretty aggressively on its last conference call. Still, even after the rate cut, stock prices have remained incredibly strong. It’s not the right stock at this point in the cycle, so it should have fallen at least $3 in the “old” pre-rate cut market. If you think about it, regular sellers, people who are active in mutual funds and hedge funds, just don’t own enough stocks to offset the constant wave of S&P index money. I have no choice but to conclude. They think they know something and take action hours in advance, but they are using market orders and are constantly fooling themselves. Anyone who takes any further action on any of these large stocks before a true market forms is almost bound to take a loss. The simplest companies contain more than can be written in a headline. Every Robinhood trader needs to learn how to write headlines before taking action on them. Then you’ll know it’s a farce. With the S&P 500 soaring, nothing is more impactful these days than an announcement of a share buyback of some credible percentage (say 5% or more). United Airlines rose 7 points after a very strong quarter and a $1.5 billion share buyback, representing 6% of the company’s stock. This is emblematic of what happens with large-scale stock buybacks without stock-based compensation (a compensation that many tech companies use to nullify the flow of money into the S&P 500). There is. It is important to pay attention to which companies will carry out the largest share buybacks. Aside from commodity-based companies like Chevron and Exxon, companies that take stock buybacks seriously are potential winners. Case in point: After Jim Umpleby bought Caterpillar, the company became aggressive in buying its own stock. In the past two years alone, the company’s stock count has increased from 530 million shares to 489 million. The rally during this period has seen the stock nearly double. I was surprised by this move. Part of the reason was that even though the business was doing very well, it was based on a lack of cyclical stocks to buy rather than an actual surge in profits. Caterpillar is emblematic of many cyclical stocks that have done the same thing. Note that the market has not created a new business cycle. That’s one reason why many funds are interested in Boeing’s future underwriting. Buyers will ignore many substantive issues about the actual management of the company and flock to deals that are likely to be highly successful. Yes, you may also want to join. So what about tech stocks? They are the least susceptible to stock buyback issues because they generate large amounts of inventory to compensate workers. Even Apple, the most aggressive Mag 7 buyback, has reduced that number from 16.2 billion to 15.2 billion over the past two years. Meta, another active buyer, has seen little decline in numbers. It is now about 2.61 billion, compared to 2.7 billion two years ago. In terms of retrenchment, share buybacks are meaningless for this group. But ownership is a different story. Because of the way the S&P 500 funds are divided, the stock base is overwhelmingly index fund base, and index fund shareholders do not sell. These represent repurchased shares and are virtually non-existent at the time of sale, but are still included when split into earnings to arrive at the earnings per share figure. This theoretically makes them an expensive group of stocks, except that their earning power is so great that it hardly matters. The key is to think of S&P as a giant power multiplier. The company has a calm shareholder group that won’t be disappointed and sell. And when stock buybacks buy back shares on a regular basis, this negative count turns into a big positive, and a group that just sits there, not making profits, not caring about profits, does nothing. I am amazed at the strangeness of the bearish group who cannot do it. There are likely to be very few sellers in a disappointing quarter. After all, it’s like the line from “Butch Cassidy and the Sundance Kid”: “Who are those people?” The bears want to know. The answer? Index funds. (See here for a complete list of Jim Cramer Charitable Trust stocks.) 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Wells Fargo CEO Charles Scharf speaks at the Milken Institute Global Conference on April 30, 2019 in Beverly Hills, California.
Kyle Grillot | Bloomberg | Getty Images
Trust index funds. They siphon cash, distribute it like a weighted stock trampoline, jump in at the moment of decline, look for a place with their desperate money, and find it in the S&P 500. You can’t see it because it comes in hidden behind the transom. The Vanguard S&P 500 ETF alone attracted $71 billion in net inflows in the first nine months of this year, according to Morningstar. This is $20 billion more than the record set by SPDR S&P 500 ETF Trust in 2023.
