"If your friends jumped off the Brooklyn Bridge, would you do it too?"
--Statement uttered by countless New York metropolitan area mothers in response to children who yielded to peer pressure (For those raised in different regions, insert the name of a locally prominent span).
Most of us think of peer pressure as a phenomenon that primarily affects adolescents. Utter the phrase 'peer pressure" and thoughts of catty high school cheerleading squads and drunken college fraternity houses spring to mind. Most passive investors (that means you if you have money invested in a fund) would be surprised to discover that their money is being invested because of a form of peer pressure, but that's the dirty little secret of the money management industry. Managers are buying stock because everyone else is.
Now that's not necessarily a bad thing in a rising market, but I suspect that most folks expect a little more for their management fees. Part of the reason for copycat behavior is that mangers are usually judged based upon their performance relative to a benchmark like the S&P 500 or some specific industry index. If a manager's fund is matching or beating the return of the underlying benchmark, rating agencies are likely to give high marks, causing capital inflows to increase and giving the manager a tidy bonus. If the fund lags behind the benchmark for any significant period of time, you can be sure that investors will be taking their business elsewhere and the manager will be looking for a new line of work.
As a result, most mangers can't afford to bet against the trend for long periods of time. That dynamic has turned most large mutual fund mangers into closet indexers, that is, they tend to hold portfolios that mimic the broader market, with a small reserve of capital held aside for bets that may create returns exceeding the underlying benchmark. Many managers increased the size of that reserve early this year, based upon a belief that the market would continue to perform poorly. The tremendous rally since March has caught them flat-footed and another cycle of poor performance is likely to be greeted by a mass exodus of capital. Clearly, they have a bit of catching up to do.
So, like the middle school kid whose primary defense is that everyone else was doing it, skeptical managers are being forced to put money into the market to avoid standing out from the crowd. They can't afford to wait any longer since impatient investors aren't likely to forgive them for missing this rally, especially after the shellacking that most took in 2008. The 12% return year-to-date on the S&P 500 has only increased the pressure on those who have lagged behind. As more money managers decide to go along with the majority, further upward pressure is exerted and the cycle continues.
This morning will bring data on consumer confidence and the Case-Shiller housing index. Since the default tendency of the market is currently to go higher, it will take seriously bad numbers to derail the rally and even benign data is likely to induce buying. Look for positive numbers to be greeted by a rush of new cash into equities as investors try to get a seat at the lunch table with the cool kids (read: bullish). This rally appears to have legs, but I wouldn't go all-in this late in the game, even though most everyone else is jumping in with both feet.
As Mark Twain once said, "Whenever you find yourself on the side of the majority, it is time to pause and reflect."
Disclosure: No Positions
Disclosure: No Positions