Credit the index funds. They sop up the cash and distribute the money like a weighted-stock trampoline, jumping in the moment of a decline, desperate money seeking a home and finding it in the S & P 500 . It’s unseen because it comes in hidden over the transom. The Vanguard S & P 500 ETF alone attracted $71 billion in net inflows over the first nine months of this year, according to Morningstar . That beats the record the SPDR S & P 500 ETF Trust set in 2023 by $20 billion. That statistic is remarkable. We don’t talk about it as a major prop to the stock market as a whole. But it’s so important because it has nothing to do with the Federal Reserve or interest rates or anything else that could normally impact the flow of funds. That also includes an upcoming presidential election between two big spending candidates — one of which would also slap on tariffs on imports that is reminiscent of the Smoot-Hawley Tariff Act of 1930, which itself came on top of the Fordney-McCumber Tariff of 1922 . They used to teach students in high school about the harm of those tariffs when it came to the Great Depression. Some of the more in-depth survey courses back then even posited that these walls of protection were proximate causes of the whole collapse of trade leading to a clueless President Herbert Hoover’s inability to avert the worst downtown in our nation’s history. They are now a rallying cry for those who can’t grasp what happened more than 100 years ago in our country. But this is not a moment where history is embraced. It’s a moment where a candidate believes that we can reverse history. Countries feared our exports at one time and put high tariffs on our goods. Our companies responded by flipping factories to those with the highest tariffs to get around the tariffs and still reach those markets. Reversing history, reversing time, will be hard to do, but the nativist rallying cry rings true, especially when it demonizes those countries that took our jobs. Who knows? It worked for the current Commerce Department with threats to Taiwan and Taiwan Semi , hence the giant Arizona semi foundry being constructed right now. Maybe there’s more hope to this strategy than I believe. No matter, it’s a reversal of our policy with unknown repercussions, and for 50% of our country, a cheered-for historical unknown. Why point this out? Simply to demonstrate how oblivious this wave of money coming is of the market and company fundamentals. But it doesn’t matter. Those who follow the teachings of Warren Buffett know only to invest via index funds in a Pavlovian fashion. The Buffett way is the American way to invest and it’s almost un-American not to. Hence this magnificent tide lifting all boats, especially the Magnificent Seven, in a self-fulfilling manner. S & P 500 money is oblivious to stock valuations of any kind and ignorant to upgrades and downgrades. It’s hard to keep a good stock down when money in overwhelms money out. The Lilliputian sellers regularly fail to do damage when matched with the oblivious index money. This money doesn’t know much about history, what a wonderfully bullish world this can be. Somewhat shockingly, the money washes over all the obsessive Fed talk. Quarter-point cut, half point — it doesn’t matter what Fed Chair Jerome Powell does. We talk about it as if it all matters. But the fact that we haven’t had a down week in six since the double cut in rates explains a lot about why we keep getting money in. A 4% 2-year note isn’t competitive to the magnet of the S & P 500 and its kin. What’s the role of earnings with his uber-bullish backdrop? A curiously positive one. We started with the banks and the numbers were so positive that the active money found a 14 times earnings home — or even an 11 times earnings anchor of Wells Fargo . Did the Charitable Trust get lucky? No, it’s just that the active money chose to key on the abstruse net interest income figure, and Wells CEO Charlie Scharf spotted that obsession ahead of other banks and gamed it with a precision that changed perception on the spot. Wells could work its way much higher until it joins the council of 14-times-earnings banks. Hence, its magnificent run since its pristine set of earnings numbers. Any price higher for a bank could be justified given the S & P 500’s 21 PE multiple. A cynic might say otherwise, that the S & P 500’s multiple is too high so the banks shouldn’t be able to rally much. But you have to know how to read the bullish room. Banks buy back a lot of stock. Charlie Scharf buys back a lot of stock: 6% in this year alone and he will probably buy much more. Why not? His stock is finally back to where it was at the beginning of 2018 when the Fed first put that miserable asset cap on Wells. What will it mean when the asset cap comes off? It wasn’t really clear exactly what it will mean even as it was asked about in myriad ways on the company’s post-earnings conference call. Whatever it is — more lending seems most likely — it’s positive. I don’t mean to dwell too much in the house of Charlie. I was shocked that Morgan Stanley could do so much better under CEO Ted Pick than under James Gorman. No misses on any line and decent investment banking that will only get better as rates go lower. That 3% yield remains a magnet. I am waiting for someone at this bank to explain a strategy, or even a tactic, for E-trade. So far it looks like it’s a Triple AAA Robinhood and no more. So disappointing because it came with the idea that there would be a younger trader who could age in to be a bigger Morgan Stanley customer. Maybe Pick will do it? Maybe Pick will at least outline a strategy? Rather extraordinary how this company has not traced out a grand plan. If management does, it would at least get an even higher PE. One look at the rise of Robinhood’s stock should make Morgan Stanley jealous enough. Think about how Schwab snuck up on the whole industry in the 90s. It’s about to happen again. The index fund cushion is an equal opportunity booster. On Friday, Procter & Gamble reported a quarter that was lackluster, with the beauty division actually plain disappointing. Now it didn’t contain a Chinese shocker — the company had traced out the woes of China pretty aggressively in that last conference call. Still, the stock’s been incredibly strong even after the rate cut. It should have been down at least three in the “old” pre-rate cut market as it isn’t the right stock for this point in the cycle. Pondering it, I have to conclude the normal sellers, those who are active, both mutual fund and hedge funds, just don’t own enough stock to offset the S & P index wave of money that always come in. There are individual investors who take action before hours thinking they know something but they use market orders and are always being picked off by themselves, Anyone who acts on any of these big-cap companies anymore before there is a true market is almost bound in duty to lose money because even the most simple of companies has a lot more to it than can be written into a headline. All Robinhood traders should be required to learn how to write a headline before they take action on one. They would know they are the stuff of farce if they did so. Nothing is more impactful these days because of the S & P 500 sop up than an announced buyback of some credible proportion, say north of 5%. United Airlines rallied 7 points after delivering a very good quarter and a buyback that will take out $1.5 billion, or 6%, of the company’s shares. That’s emblematic of what happens with a big buyback without stock-based compensation (something many tech firms use that renders moot the S & P 500 inflows). We need to watch which firms do the biggest buybacks. Outside the commodity-based companies, like Chevron or Exxon , any company that adopts a serious buyback is a potential winner. A classic example: Ever since Jim Umpleby took over Caterpillar the company has become an aggressive buyer of its own stock. Just in the last two years the company has taken share count to 489 million from 530 million. The rally during that period has led to an almost doubling of the share price. I was taken by surprise by this move, in part because it was more based on a shortage of cyclicals to buy than it was the actual earnings surge, even as business has been quite good. Caterpillar is emblematic of a host of cyclicals that have done the same thing. Remember there has not been a creation of a new cyclical in the marketplace. It’s one of the reasons why so many funds are interested in the upcoming Boeing underwriting. Buyers will ignore any of the substantive issues of the actual running of the company, which are multitudinous, and swarm to what will most likely be a very successful deal. Yes, you might want to be in on it. Now how about the tech stocks? They are the ones that are most immune to the buyback issue because they create so much stock to compensate workers. Even the most aggressive buyback of the Mag 7, Apple , has shrunk its count from 16.2 billion to 15.2 billion in the last two years. Meta , another aggressive buyer, has hardly dented the count — about 2.61 billion now versus 2.7 billion two years ago. Buybacks are meaningless to this group when it comes to shrinkage. But when it comes to the ownership, that’s a different story. Because of the way that the S & P 500 money is divvied up, the share base becomes overwhelmingly index-fund based and the index fund shareholders do not sell. They are the equivalent of shares bought back, they almost don’t exist when it comes to selling, but they are still included when you divide them into the earnings to arrive at an earnings-per-share figure. That makes them a theoretically expensive group of stocks, except its earnings power is so great it almost doesn’t matter. What does matter is that you think of the S & P as a huge force multiplier. It is a sedate group of shareholders that don’t sell on a disappointment. And as the buybacks routinely take out stock, it makes this passive count into a huge positive, a group that doesn’t take profits, that doesn’t care about earnings, that just sits there to the wonder of the bears who can’t believe there are so few sellers on a disappointing quarter. In the end it is like the line from “Butch Cassidy and the Sundance Kid”: “Who are those guys?” The bears want to know. The answer? The index funds. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Wells Fargo CEO Charles Scharf listens during the Milken Institute Global Conference in Beverly Hills, Calif., on April 30, 2019.
Kyle Grillot | Bloomberg | Getty Images
Credit the index funds. They sop up the cash and distribute the money like a weighted-stock trampoline, jumping in the moment of a decline, desperate money seeking a home and finding it in the S&P 500. It’s unseen because it comes in hidden over the transom. The Vanguard S&P 500 ETF alone attracted $71 billion in net inflows over the first nine months of this year, according to Morningstar. That beats the record the SPDR S&P 500 ETF Trust set in 2023 by $20 billion.
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