We have focused on the monetary tsunami set in motion by central banks, but there is another force contributing to the record-high valuations in the US stock market. That force is the shift towards passive and ETF-focused investing that began more than two decades ago and has come to dominate flows within the stock market. So-called “passive” strategies use rules-based investing, often to track an index by holding all of its constituent components or a representative sample of those components. There is no discretion on the part of the asset manager. For example, money going into an index fund will be allocated to all of the stocks in the S&P 500 according to their weight in the index, meaning that the stocks with the highest market capitalizations will receive the lion’s share of the money flowing into such a fund. Due to passive investing, the more expensive a stock becomes the more investment it will attract and the more expensive it...read more...