Whose Purchases Are Driving Stock Prices Higher?

The stock market keeps going up. The top tech picks have been especially impressive. Strong corporate earnings, a pause in the intensity of the trade war, and low unemployment have been positive factors. But, just exactly whose purchases are driving stock prices higher? And, why is it important to know that?

Who Is Buying Stocks?

CNBC published a useful article about who is doing all the buying that is driving the market up.

Given a series of new highs for the S&P 500, the Dow Jones Industrial Average and the NASDAQ, the obvious question is who is doing all this buying?

The author goes through the list of investor categories and come up with conclusions that should be of concern to regular investors.

The large investor groups for stocks include retail investors who own about 20% of US stocks. However, this group now has holding comparable to 2007 and is likely not the main culprit in driving up prices. Public corporations themselves are larger factors with money coming from the Trump tax cuts going to share buybacks. The same amount of investment capital (or more) is going to purchase fewer equities. That fact greatly skews the supply and demand curve!

And, hedge funds have become a huge factor in the markets. Money invested in hedge funds comes to a third to a half of that held by retail investors. But, the holdings in these funds are by definition more labile. Unfortunately for many hedge fund investors, the S&P 500 went up 31% last year while the average US hedge fund dealing in equities did about half that. The result is that the “rebalancing” of portfolios is impressive, especially as fund managers have attempted to make things look better at year’s end.

Quant funds, multi-strategy funds, and high-frequency traders add to the mix on the hedge fund side of things.

Why Does It Matter Who Is Buying Stocks?

It matters whose purchase are driving stock prices higher because it tells you a bit about their intentions. Success long term retail investors tend to follow an intrinsic stock value approach when investing in stocks. Hedge funds and short term traders are looking to time the market. If you are following the example of those who are looking for long term value, you want to emulate long term retail investors. If you are buying stocks because the hedge funds are driving up prices (temporarily) you may be in trouble as you prepare to stay the course and they are ready to bail out at a moment’s notice.

A common theme for folks promoting long term investing is to emulate Warren Buffet who only invests in companies that he understands and only buys when the intrinsic value is greater than the current stock price. That approach and following the purchases of hedge fund managers may make you money in the short term if you can respond fast enough but it does not put you in a position to sleep well at night with solid and dependable investments!

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