While the coronavirus can take credit for much of the volatility we’ve experienced on the markets lately, it’s not the only issue. For years, the steady rise of passive investing may have been creating unexpected and important financial market vulnerabilities. In this podcast, featuring content from the Bloomberg Odd Lots podcast, we take a dive into how passive money has been fuelling the spike in technology stock prices and why that’s a real problem for markets. Even though passive investing is the best strategy for most investors, added up, passive money may be undoing the rationale for the stock markets themselves. – Felicity Duncan
It’s been a rough couple of weeks for investors. Stock markets have been plunging into bear territory around the world as they try to assess the economic impact of the coronavirus and the oil price shock. Although there was a bounce on Friday, futures are suggesting that we’re going to open to weak markets on Monday, with further corrections likely.
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Against the backdrop of all this chaos, it can be hard to step back and get some perspective – only true gurus like Warren Buffett seem able to manage. But it is important for all of us to take a moment to ignore the noise and think about the deeper, structural challenges global markets face.
One key change in markets in recent years has been the rise of passive investing. As more and more investors make the rational choice and opt for market-level returns with low fees, the fundamental structure of world stock markets is undergoing an evolution. That change has some serious implications for how markets work. And as markets shudder, the coronavirus correction may expose some of emerging weaknesses in the days to come. In this podcast, featuring content from the Bloomberg Odd Lots podcast, we take a look at just how passive investing may have driven inflated tech valuations, which now face a potentially painful correction.
Before you jump back in and buy the dip, it’s worth thinking about these larger issues.
