Passive investors don’t care about President Trump. This is the only conclusion that BK can draw after watching the US equity market shrug off a disturbing, albeit entertaining press conference yesterday. BK was confounded by how “the market” could still think that President Trump will get any of his agenda off the ground with the chaos surrounding him – but then he realized passive investors are nihilists man, they believe in nothing.
The relentless charge higher in US equity indexes makes a lot more sense when you realize all the money pouring into passive index funds doesn’t care about valuation, tax reform, protectionism, Obama Care or anything else. As long as the money keeps flowing into index funds the stock market can chug higher. The risk, of course, is that the price becomes more and more detached from reality. It’s only a matter of time before somebody declares that index investing has created a permanently high plateau.
Eventually this will all end – probably when the great migration from active to passive investing is complete. The trick for the active investor is to step off the nihilist ride just before you get a bowling ball to the groin.