Who is behind the ups and downs? What you should know about institutional money managers

If you follow business news, you've heard a lot lately about how stock market trading volume is low and that it's dominated by institutional money managers as opposed to long term investors. Adding to this is how many institutional traders are not committed to the stocks that they buy, but rather they are focused on outperforming the short term performance of their respective benchmarks. They buy, they sell, they go with the flow of the week or the month, and they leave in their wake 1% plus moves in the major stock market averages almost every day. While it may be easy to assume that this broad characterization describes all institutional money managers, in reality, it highlights the tug of war taking place between two different kinds of institutional money managers. There are a great many that truly are long term and committed shareholders, but since active ones are the ones who dominate the market currently, I refer specifically to them. The rest of 2010 will be dominated by the tug of war between two kinds of institutional money managers. And herein is the explanation of who is really behind the big ups and downs as of late. First, there are two different kinds of institutional money managers: The MACRO ones who are simply making allocation choices between different asset classes (equities, fixed income, and cash equivalents). For example, this group may decide to reduce risk in their portfolio by moving from 80% stocks/20% fixed income to 60% stocks/40% fixed income. Meaning, the allocation percentage in stocks was cut by 25%. In this group are state pension plan and endowment money managers. They're not fixated on choosing individual stocks and bonds, but rather, they buy and sell baskets of securities that represent a broad measure like the S&P 500 or the Barclays Aggregate Bond Index, the most widely followed bond market index. The MICRO ones are the managers who are engaged in "on the ground" research of individual securities and they typically stick to just one asset class. An example would be a large cap stock mutual fund manager. This manager isn't concerned with allocating between stocks, fixed income and cash. But rather, this one is locked into large cap stocks like IBM, Proctor & Gamble, and Home Depot...just as an example and not necessarily my recommendations. He or she will pick from among a plethora of big companies based on metrics like corporate earnings. Tie it all together for an explanation of the current market environment: Right now, with the MACRO economic statistics quickly rolling over and pointing to a slowing economy, the MACRO institutional money managers are spooked. Their investors need to live up to actuarial assumptions and these portfolio managers have to mitigate risk. Hence, they reduce their allocation of stocks and put the money into fixed income, or what you would call a flight to safety. Notice the extremely low yields on the entire Treasury securities yield curve? Hence, their selling of stocks drives the stock market lower and their buying of Treasurys drives those prices higher. These guys sell Treasurys to buy stocks and vice versa. Also right now, with individual large company earnings coming in so strong, the MICRO managers are buying the stocks of those companies, hence, pushing up their respective prices Stocks are stuck between the sentiments between these two kinds of institutional money managers. Neither one at this moment has the upper hand. What are more important, individual corporate earnings or economic stats? This is the subject of endless debate. Ultimately, my experience tells me that the MACRO ones hold more power than the MICRO ones and true validation for both is when they both agree at the same time. We'll all be watching and I'll be sure to let you know when I believe we're close to that point. But at least after reading this over simplified commentary, now you know who is behind the big ups and downs as of late. On another note, I was recently asked what the biggest change is that I've seen since I entered the securities business, which was 1990. The speed in which my answer came out of my mouth was surprising to me. For the first 10 years of my career, investors couldn't wait for their high yielding Treasury's and CD's to mature so they can invest the money into the stock market. For the second ten years of my career, investors couldn't wait to invest money into low yielding Treasury's and CD's. I look forward to the next 10 years since everything is cyclical and many investors often end up selling when they should be buying and buying when they should be selling. In my opinion, it is time to become a committed shareholder now and in 2019 become a committed Treasury holder. Thanks for reading this. Please forward this to anyone you know who may find it interesting. Please reply me if you'd like to comment. Interested in becoming a client? Call me. Let's talk about it. (Disclosure: This is solely MY opinion. Of course, you are welcome to share your opinions with me too. If you act on any of this without speaking to me first and you lose money, don't blame me. I may be wrong. I reserve the right to change my mind about any of this whenever I want and without warning. We're NOT totally out of the woods yet! Have a great day! J) This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed. Any opinions expressed herein are subject to change without notice. We are registered to sell securities in the following states: AZ, CA, CO, CT, FL, IL, KS, KY, MD, NJ, NY, PA, VA, WA Securities Offered through NEXT Financial Group, Inc., member FINRA/SIPC. CLiENTFIRST Strategy, Inc. is not an affiliate of NEXT Financial Group, Inc. Mitchell Goldberg, AAMS, is the president | investment professional at CLiENTFIRST Strategy, Inc., Woodbury, N.Y.