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Drastic makeover looms for S&P 500
- cracker_jacks 6y agoI wonder how buying high and selling low (the strategy of S&P 500 holders) will work out in this new COVID era.
- david-gpu 6y agoWhat makes you think that SP500 index funds, which are cap-weighted, amount to buying high and selling low?
- cracker_jacks 6y agoCompanies leave the index when they fall below a certain market cap. Companies enter the index when they are above a certain market cap. That is literally the definition of buying high and selling low.
- david-gpu 6y agoThe turnover rate is low and the weight of those companies in the index is very small. That said, I prefer broader indices.
- KittenInABox 6y agoI think it’d be more concerning if this wasn’t the case...
- qeternity 6y agohttps://outline.com/HjUNun https://outline.com/HjUNun
- cbanek 6y agoI guess while the average passive investor doesn't care (in that this reshuffling will happen under them mostly without their knowledge), it seems like a great front-running opportunity for the banks and active managers. A lot of money gets put into the S&P 500 and it must create quite a bit of buy-side demand.
- kasey_junk 6y agoJust so we are clear, front-running means something very specific in trading and active managers preparing for index changed isn’t it. In fact this sort of change has long been priced into the market, it won’t change prices much at all when it happens.
- cbanek 6y agoAh, the great "it's priced in" - but is it really? I guess nobody can really know, unless you're one of those that says the market is always correct. And yes, there's front running an individual trade, but I was thinking a much longer timeframe, although I don't know what the right word for it would be. Would that be considered momentum? Pre-momentum?
- srl 6y agoWell, you can know, by looking at whether or not there's a change in stock price upon announcement of inclusion in an index, right? https://www.nber.org/digest/nov13/w19290.html https://www.nber.org/digest/nov13/w19290.html It appears that it's not entirely priced in.
- kasey_junk 6y agoNo idea what the right word for what you are saying is. But it’s not front-running. Using front-running here would be similar to if I described a social engineering hack as a “zero-day”. Except worse as front running is frequently legally defined by groups like the sec & finra.
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- stevenwliao 6y ago> the index committee is probably hesitant to add more technology firms This surprised me. I had thought that S&P 500 was an objective list of large cap stocks, without subjective decisions about which companies to include.
- ceejayoz 6y agoNope. Lots of opinion involved, especially in the "representative of the US economy" bit. https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_criteria https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_crit...
- dcl 6y agoCalling it now, this is going to result in a huge scandal. Due to the sheer size of investments based on the index, influencing those opinions will become very valuable for certain players.
- perl4ever 6y agoThere could be a scandal, but how would it be "huge"? You could throw darts at a list of large companies and weight them with some really dumb rules and get an index that's pretty close to "the market"; that's basically what the Dow is. The difference between even the S&P 500 and a total market index (i.e. all the smaller stocks that exist) is pretty insignificant to returns (and recently bad for them), and I believe the total market funds have become more popular than the traditional S&P 500 ones anyway.
- stevenwliao 6y agoThe timing of when individual stocks are added or removed from the index seems like valuable information to holders of those stocks.
- perl4ever 6y agoIt's one form of possible insider trading among many. In any case, one of my points is, say you want a fund that tracks the stock market, a Vanguard index fund maybe, and you are concerned about their S&P 500 fund being gamed or "front-run" or whatever you want to call it. You don't trust it. They have a "total market" fund with the same 0.03% expenses. Plus, the AUM are the same or a little more, so you don't even have to go against the herd. So if something did happen to the S&P 500 fund, it seems like it would be inconsequential. Who needs it? And people are going to notice if something is wrong because the differences between the S&P 500 fund and the S&P 500 index, or between the fund and the total market, are so small. What you need to worry about is some obscure index fund where everybody is not aware of what it should return. Like, I don't know, USO?
- 01100011 6y agoThere is a part of me that thinks we will see permanent changes from COVID-19... but then there is the part of me that remembers how quickly society can forget lessons, and how new generations can rise up and carry the world forward in unforeseen ways. I am hopeful that we will not forget this experience, but I know how far away 2008 and 2001 are in people's minds already, and I think in ten years this will be as talked about as the Spanish Flu was before COVID. Can anyone show me an example where 'this time will be different' ever proved to be true? Don't get me wrong, there were some changes coming that will happen and be blamed on the virus, like the death of some major retailers, a commercial real estate crash, the death of nightclubs and bars, etc. But those are evolutionary changes which have taken decades to materialize.
- xwdv 6y agoThe things that will be permanently changed will be things that were always destined to changed but were being held back by the status quo. Work from home for instance, many companies never wanted to even try it, even if it could save money, but now they’ve been forced to try it and actually like it, thus it will become a new status quo as people come out of quarantine and realize what a drag it is to actually have to leave their new habits and go back to shitty routines. Same with meetings, we don’t need god damn face to face meeting for everything. A teleconference is good enough. Why bother flying across the country? Fuck it.
- dweekly 6y agoWhen was it true that "this time it's different?" The dot-com implosion meant that you can't go public without revenue. The bar for IPOs then shifted far upward (even irrationally so) and has remained there since. 9/11 permanently moved the bar on state surveillance, war powers granted the president, and screenings. That mostly hadn't happened after prior hijackings or accidents. The Columbia disaster killed the Space Shuttle Program. There are many events that permanently transform affected systems. Coronavirus is a once in a century curveball and we are in the first chapter of many in the COVID-19 book. Many things will change. We don't know how many yet.
- rayhendricks 6y agoThere will be some retailers and airlines who do go bankrupt, and we might see a shift to more teleworking for white-collar workers but apart from that even if there is a second wave this fall it will still be remembered 5 years from now as a non life-changing event. Spanish flu probably had a death rate >=10x covid, and even with that society did not change to much. https://www.weforum.org/agenda/2020/04/covid-19-how-spanish-flu-changed-world/ https://www.weforum.org/agenda/2020/04/covid-19-how-spanish-... This will not stop politicians from both parties from trying to use the crisis for political gain.
- anonu 6y agoSo there's a problem with thrashing... Where deeply down companies may drop out of the index on this rebalance but come back in sometime down the road, in a quarter or 2. The CRSP indices, for example, solve this problem by buffering between the market cap segments. The S&P should introduce a similar mechanism to it's methodology. This would also reduce index rebalance trade aheads and thus reduce costs.
- CapriciousCptl 6y agoSince passive funds mostly weigh investment by market cap or some other indicator of size that’s already gotten smaller for these firms I’m not sure swapping out the smallest 30 would make up more than a few percent of allocated funds.. far from drastic for the passive investor. From the firm perspective it’s also hard to quantify the effect on stock prices from dropped firms when the reason they’re being dropped is their market cap shrunk— there’s a chicken vs egg quality to the situation. Obviously some institutions will be forced to sell but the market is generally efficient in the long run— it’s not like getting dropped affects the underlying business value. In the short term the businesses will have less access to newly issued equity capital however.
- hanoz 6y agoI'm convinced that the markets, which, let's remember, were high on the hog all throughout the obvious impending catastrophe of this virus sweeping in from the east at the beginning of this year, until the moment reality was shoved in their faces in the form of an outbreak in Italy, have not yet absorbed the enormity of the long tail of this pandemic and the lockdown.
- echelon 6y agoIs it a worse place to put your money than USD or housing? Where do you suggest we put our investments?
- hanoz 6y agoFair point. It is difficult to fairly price a thing in terms of a debauched currency.
- Jorge1o1 6y agoNot giving official financial advice here because I would need to understand your individual circumstances, but if you have the view that equities on the whole are going to fall, you can buy bonds, uncorrelated assets (think gold, but calculate the correlation yourself), low beta stocks, delta-neutral option strategies There’s really a lot you can do
- bobbyi_settv 6y agoBonds when interest rates are near zero?
- pao 6y ago> “It was more happenstance than actual foresight that those companies would end up getting worse,” said Keith Gangl, portfolio manager for Gradient Investments Sounds like sour grapes to me. I imagine this is the line this guy is feeding all his investors when they ask why they're paying him 1% and getting beat by the S&P.
- dilandau 6y agoWon't alter the price very much, as the institutional boys following this would have assumed it would happen. The market is very decidedly not the economy. Everything indicates disaster for the gdp, which is a measure of economy. But the market is sitting about where it was 1 year ago. People expect that America is going to pull through. Sentiment may change but right now its pretty bullish. Lots of retail investors driven by FoMo, of course, and people who rushed in to buy the dip. Google trends is illustrative of the point. But I think the corporate debt, unemployment, a possible trade war, supply shortages, and eventual bankruptcies are going to send it back down at some point.
- airstrike 6y agoMy own personal view as someone who works in Wall Street (but not in trading) is that the market is currently too optimistic in the wake of surprisingly positive (or "not terrible") Q1 2020 earnings reported in early April. The problem is that those earnings don't really say anything about the world we live in today, because (a) the U.S. only really started panicking in mid-March, when most of Q1 was already over and (b) companies did their very best to make Q1 look as good as possible since they realized Q2 was going to be absolute shit anyway. That includes trading long-term, sustainable results (good) for near-term gains (bad, but which they felt "necessary" given the current environment) including not only cost-cutting and "rightsizing" but likely some liberal / aggressive accounting. At work, people say we're in the second inning of the COVID-19 game, and although I hate baseball, I tend to agree. Valuation multiples have essentially recovered to pre-COVID-19 levels. The S&P 500 was down only 10% this year (as of some date last week). Intuitively, does anyone feel the economy is just "10% worse"? Especially coming off of record highs that many already felt were in need of a correction... I think the "second wave" everyone keeps worried about is more likely to be defined not only by a surge in cases but perhaps more significantly by the massive market crash as the current house of cards begins to unwind. Grab your hot dogs, the third inning is about to start.
- sytelus 6y agoI don't think market is optimistic (ex. projections from pretty much every investment bankers), but instead reality is extraordinarily distorted by massive cash infusion and govt's commitment to not let market go down at any cost. This makes asset pricing as dictated by US government as opposed to market forces (same as in countries like Russia). This is first time in history where stock price is rising literally in proportion to job loss and revenues loss!
- airstrike 6y agoThe jury is still out on whether those measures will be effective, though. To date, they really haven't done much. Unemployment is at 15% and expected to hit 20% in the next month or so, to name just the most obvious data point.
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- neonate 6y agohttps://archive.md/yWOah https://archive.md/yWOah