Oil prices rose overnight to their highest since early June, with global benchmark Brent crude briefly above $90 a barrel before retreating again. But, after much jitters over fighting in the Middle East and the faltering AI trade last week, futures suggest US stocks will start the new week on a strong note. Earnings from Tesla, Intel, American Express, Verizon and Google parent Alphabet will give investors a lot to think about in the coming days.
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it’s hard to be different
Mutual-fund managers can’t take a vacation, and probably never will. At least now he has a better excuse.
Hedge-fund manager David Einhorn caused a stir two years ago when he called the market “fundamentally broken.” Money is routinely taken out of paychecks and put into index funds that track the S&P 500, buying stocks without regard to price – only weights of them.
Index funds are much cheaper than active funds so after expenses they outperform most of them. But, according to Einhorn and others, what people who buy them don’t realize is that behind some companies’ rich valuations is not research done by a shrinking group of people like them, but the weight of their cash.
“They’ll assume everyone else is done,” Einhorn said.
Index fund fans say claims of wrongdoing are mostly sour grapes of fund managers struggling to outperform. For one thing, index funds do very little trading of their own. Active managers may have an even easier job because they capture a smaller portion of the market.
However, if anything, the opposite is happening. Last year, four out of every five US stock mutual funds couldn’t beat the S&P 500.
Now a University of California Ph.D. An award winning paper by. Student Hannah Unterberg helps explain why. She doesn’t argue that markets are broken, but her research shows that the growth of passive funds actually makes life harder for active managers.
Active fund managers have to find stocks that have been ignored by the index. But when they face redemptions and have to sell them, those shares face “asymmetric price pressure,” according to Unterberg.
In plain English, when money moves from a fund that looks completely different from the index to one that matches the index exactly, the stocks the manager favored suffer a slight loss and the stocks he avoided gain a slight gain. Of course, for every seller of a stock there is a buyer, but that still has little impact on performance.
Since fund managers are penalized for being different, it seems the best move for continued employment is to make their fund more like the S&P 500. But Unterberg points out the flaws in that strategy.
“You may decide to become more passive, but then how are you convincing your investors to not just buy index funds?”
It is a vicious cycle. As index funds keep winning, they will make more money.
Does it still pay to be a good stock picker? In theory this should happen in the long run. This is good news for fund managers who understand investors. Unfortunately, patience is in short supply in the investment world.
This is an edition of the Markets AM newsletter, preparing you for the trading day ahead with expert insights about companies and industries poised to disrupt the markets. If you haven’t subscribed, sign up here.
stock i’m looking at
↗️ alibaba: Shares of the Chinese internet giant surged after it previewed its new AI model, which it said is second only to Anthropic’s Fable 5.
↘️ Ryanair: Shares of the budget airline fell due to a decline in first-quarter profits, low fares and rising fuel costs due to the conflict in the Middle East.
🔎 amc entertainment:The movie theater chain is set to report second-quarter earnings before the opening bell.
↘️ segro:UK real-estate investment trust shares fall after London Prologis Said Segro rejected its takeover bid, the industrial real-estate company’s third attempt to buy it.
↗️ micron technology, Marvel Technology, intel, advanced precision instruments: Shares of chipmakers recovered slightly in premarket trading after Friday’s tech selloff, which was triggered by the release of a new model from China’s Moonshot AI.
a big chart
America’s largest food companies have done everything they can to win back shoppers. They’ve cut prices, increased marketing and added protein to everything from Cheerios to Goldfish. It’s not working and investors are wise to move on.
what am i reading
Ordinary investors, once the Magnificent Seven’s most ardent fans, are looking elsewhere for the next superstar tech stocks. (WSJ) Skyrocketing deficits threaten the U.S. bond market, writes Greg Ip, the Journal’s chief economics commentator. (WSJ) A corporate crime spree? The Trump administration has moved far away from blaming companies for the wrongdoings of their employees, recently closing a series of criminal investigations with lenient resolutions or no charges at all. (WSJ) They call him the “killer” on Wall Street, and he has a new target. (WSJ) Federal officials accepted expensive gifts from Paramount because the company needed approval for deals. (Pro Publica)
Today in market history
📰On this day in 1969, Neil Armstrong became the first person to walk on the Moon. The world was stunned when the historic event was broadcast live, but Wall Street yawned. The Dow Jones Industrial Average fell 1.4% the next trading day.
beyond the newsroom
WSJ | buy side: These are the top cold-brew coffee makers to keep you cool and caffeinated.
about me
Business and finance have fascinated me for a long time. Before writing this newsletter, I spent a decade editing the Wall Street Journal’s Heard on the Street team, writing two investment books and managing a team of stock analysts at a global investment bank.
The Markets AM newsletter prepares you for the trading day ahead with expert insights into companies and industries poised to disrupt the markets. Send your feedback to markets.am@wsj.com (if you’re reading this in your inbox, you can just hit reply). For a recap the day the markets close, sign up for Markets PM