It's massive and increasing amounts of money that is not price sensitive and keeps growing. There's an underlying bubble message: "the stock market always bounces back, so keep plowing your money into it even when it's down".
Apparently passive funds are 60% of mutual funds / ETFs now https://www.avantisinvestors.com/avantis-insights/has-passiv...
Even more insidious is that this is in part driven by retail who are not paying attention. It's literally the definition of passive, hands off
So at some point, valuations will become increasingly disconnected from fundamentals. Active players will notice and find some way to take advantage. Passive yields will eaten. But at what point will the scales tip and people decide it's a sham and there are better places to park your money? That's when a huge bubble will collapse.
I don't know. Honestly don't know if that will ever happen because I'm not sure what a better investment for average Joe would be than a passive broad stock market index.
If you are invested for the long term then just don't think about it. If you want to diversify a little then go for it - slowly. Also keep in mind your US index fund is full of international companies anyways.
> there is no way going active can help me—I don't have enough access to the right people
It really comes down to this realization. Without access to what all these billionaires and their companies have access to, I just feel like a pawn with everything to lose.
With the rise of ETFs and 401ks people are incentivized (literally) by the US Gov to put their money in the S&P500
And the "instead of picking a needle in the haystack, just buy the whole haystack" only works if there is actual stock picking going on and you get to ride that, but now when there's so much passive investing, it's just everybody buying the haystack, even if there is no needle
Like with the ETFs and 401ks, they will happily buy as much NVDA at its ATHs, it's quite literally massive liquidity feeding orders all the time, coming from retail's monthly paychecks
You basically need the world to decide that EMEA/JAP markets are collectively stronger than the US stock market, and to collectively move their capital outside the US to be deployed in EMEA/JAP. Moves away from Mag7 to US value stocks will be captured by the US stock market index funds; moves into commodities will be seen as opportunities to buy the dip before a market rebound. You can view attempts by US private equity to purchase real estate as attempts to hedge against overvaluation in US markets, but if the US has another Great Depression, those real estate purchases won't be able to fetch high rents or prices anyway.
In short, just follow the normal advice, which is not to put all your money into US domestic stocks, but to also purchase foreign stock market index funds, which help to hedge against the risk of the entire US stock market crashing. In the long run, US index funds are still a good investment - US courts still are quite powerful to settle contract disputes, the US does not have capital flight controls, and American business culture is still one of the hardest working, greediest forces on the planet - a Great Depression v2 would not change that.
Capital is not going to "move away from US capital markets" because those markets tend to over-perform and will likely still over-perform. What companies are you investing in that are not nVidia, Google, Amazon, Meta, Apple, Open-AI, Anthropic etc. etc.?
It's really hard to predict market crashes. I think it makes sense to be more cautious but also that's what could have been said a year or 2 or 5 years ago, in which case you would have missed a lot of potential gains.
I'd like to make a technical note about markets because I see this mistake repeated in the comments. The money doesn't have to move out of the US markets to somewhere else for the stock market to crash. It only requires a destruction of confidence. For a hypothetical example, suppose the S&P 500 closes at 7000 on a Friday, and everyone loses confidence in the S&P 500 over the weekend (for whatever reason). The market can open on Monday 3500 with not a share traded before the open (no money was moved out of the market), and investor portfolio values are now cut in half. Since confidence is broken, nobody buys the dip, and the market closes Monday down to 3000.
It's an extreme example, but it's worth understanding the fundamental underpinnings. The markets are a confidence game. Sometimes we forget because we have good reason to be confident (e.g. in the S&P 500) and so it fades into the background that something like this could even happen, but it's not hard find these sorts of events in history.
The way in which that narrative does not happen is if the capital leaves entirely to be locked up in other investments; in the context of index funds which would anyway rebalance to rise with those other investments, if the capital leaves for other countries, to investments that are not covered by the index funds.
In the past bad news led to jumpiness and people getting out, including retail. Now you have a massive amount of money that keeps going. So if you jump out..you see that so much money continues to plow in, and price starts going back up. So you come back in so you don't miss out. And on we go.
I think it's very possible passive investing is changing the dynamic, where downturns are more muted. It's overall a good thing but again, as I said above, it feels like it's setting up an even bigger ruin down the road
Even if people were to do active bets on equity, what matters is the amount of money flowing in the asset class, so as long as there's an infinite stream of long investments into equity (due to 401k, etc.), the prices will rise.
You'd need people to actively balance their allocation between asset classes rather than stock X vs Y to counter those equity bubbles, but I don't think it's happening (and equity becomes too big to fail given the link with things like pension in the US).
If the right price for equities is 30% of their current value, and if achieving that price means the regime will fall in the next election (or sooner due to civil disorder), then the regime will not allow that to happen.
A regime that controls its own currency has nearly unlimited power to prop up whatever asset classes it wants to, from bonds to equities to housing.
Doing that has consequences like inflation which people don't like, and could cause them to vote the bastards out. But the regime could also print even more money for direct deposits into voters' bank accounts before an election.
So it seems like equities have limited downside until there's a regime change.
Maybe there will be a "huge bubble" in the future but it doesn't look that huge right now. Forward P/E for S&P500 is about 22. That is 4.5% yearly return even if there is no growth beyond 2026. This is also real growth as earnings raise with inflation so nominal expected return is about 7% even if there is 0 growth beyond 2026.
Meanwhile risk-free rate (basically short term government bonds) is around 3.5% per year right now (nominal). That 7% is quite pessimistic as some "net growth" (growth - costs of generating it) is expected beyond 2026 and you can only get 3.5% "risk-free" I am not sure why people call current valuations crazy or what their expectations for "fair valuations" are. Equity risk premium seems to be still above 4%. Maybe that's on the low side but far away from bubble territory, let alone "a huge bubble".
Passive, (especially global) index funds doing so well and outperforming the vast majority of actively managed, general funds () is not a given, but they point to a different problem.
It means that most actively managed funds are still overpriced (fees), don't deliver efficient price discovery, and in some cases destabilize the market by making consistently wrong bets.
That's not the fault of index funds. In fact they make it easier for high performing investors who have deeper insights.
There are plenty of funds that don't compete on just on beating the index, but have other goals.
