A fascinating chart I came across on Twitter. Since the financial crisis around $ 3 trillion has been flowing in to passive index funds which typically have a lower fee than active funds. But what is interesting about this is that there have been no net inflows in US stocks since the financial crisis.
All the money that has flowed into passive index funds have been offset by an outflow of actively managed funds. In fact, there is actually $350 billion less in US equity funds (both active and passive) than before the financial crisis.
At the same time the S&P 500 is up 300%. Even more when dividends are factored in.
So why then are stocks higher if demand from investors in funds actually down $ 350 billion over the last decade?
The answer could be because of demand for stocks from buybacks. Buybacks have become more popular since the financial crisis. With buybacks a company uses its own money to buy back its own shares in the market. Buybacks are popular because they are a very tax efficient way to generate shareholder value.
When a company performs a stocks buyback program the company buys back their shares on the stock market. This way the amount of outstanding shares is reduced. Remaining shareholders will share their profits with less shareholders. This should lead to an increase in the price of the remaining shares.
If a dividend is paid out a tax must be paid in this received dividend. A capital gains tax only has to be paid when the shares are sold. So during the period which an investor holds his shares no taxes have to be paid (which is different from when a dividend is paid).
Is investing in real estate more profitable than investing in the S&P 500 over a long period? This long term chart shows that for much of the last century investing in the S&P 500 returned much greater returns than investing in real estate did. This chart only misses one thing in my opinion. This chart does not show possible rental income and the re-investment of this rental income in other houses. At the same time it also doesn’t show possible costs and taxes associated with homeownership and thus with investing in real estate. Nonetheless it is a nice chart to view.
Here is another chart showing US house prices from 1987 till April, 2019. This is the Case Shiller Index.
Here is the same Case Shiller index with year-over-year percentage change until April 2019. This chart is showing that the rise of house prices has declined the last few years. A cause for this has been the Federal Reserve which has raised rates from 2016 till 2019. This has caused mortgage rates to rise over that same period.
Here’s a chart of the average fixed rate on 15 year and 30 year US mortgages. It will be interesting to see whether the drop in rates will lead a pick up in house prices later this year. From the end of 2018 mortgage rates have been dropping lower as it has been anticipated that the Federal Reserve will lower rates (which they have done with 0.25% in July, 2019.
JP Morgan Funds Twitter account posted a nice graph on Twitter today showing that, even while the S&P is trading near an all time high, this rally could go a lot further. The S&P 500 is still trading below the average forward P/E of the last 30 years according to the graph. According to this chart the S&P 500 is fairly valued and we are not experiencing some kind of bubble. Of course earnings will need to keep growing in the future to keep justifying a higher price.