🎙️ Index Boom

The share of American households’ allocation to stocks vs. overall assets has never been greater.

The current figure is 42%, the highest percentage since data became available in 1952.

Credit decades of fee compression, easy-to-use online brokerages, and steady valuation growth for helping more and more Americans get a slice of the pie.

In markets this week, stocks kicked off September with back-to-back losses. September is often volatile, and this year might be no different.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Corporate America catches in on index boom

• Ultra-rich families get even richer

This, and more, in just 5 minutes to read.

Chart of the Day

Invest With Confidence: FNRP’s Advantage

Looking to diversify from stocks?

Dive into the world of commercial real estate with First National Realty Partners. Our curated, high-yield opportunities offer passive income streams and tax-advantaged growth potential.

Join savvy investors today.

In The News

🤑 Corporate America Is Cashing In on Trillion-Dollar Index Boom

Chances are, you own an index fund. And most of us know that the index-fund revolution has showed few signs of slowing down. Major players like BlackRock and Vanguard have become increasingly dominant shareholders in many large companies, which has created far-reaching implications. 

Corporations, too, have piled into the shift by selling large quantities of their own shares to meet the growing demand from index funds. Research from Harvard and Notre Dame indicates that over the past 20 years, publicly listed companies have been the largest sellers of equity to index funds, surpassing other market participants like financial institutions and short sellers. 

In other words, companies are adapting their capital structures in response to the growing influence of passive investors. 

Stay flexible: The rise of index funds has changed how investors allocate their capital and prompted a reevaluation of corporate strategies and market behaviors. 

• Here’s Bloomberg: “The rise of passive investing has given companies a ‘greater degree of flexibility — whether they use the cash to invest more in their growth or it allows them to change their capital structure and get financing in ways that are more optimal,’ said an assistant finance professor at Notre Dame. ‘Index funds through their demand can have a real impact on the real economy.’”
  

• Companies are meeting demand from passive investors through equity offerings such as seasoned stock offerings, convertible bonds, and warrants that can be converted to equity. Employee stock options are a channel for the process: Employees with vested options sell their shares to meet passive investor demand.

Why it matters:

The new research by Marco Sammon and John Shim provides insights into how the $10 trillion index fund industry impacts the market's role in capital allocation. (Sammon is known for his research suggesting that passive ownership of the U.S. market might be double the consensus estimate.)

What else to know: Being included in widely followed indexes gives companies access to a large pool of price-insensitive buyers (passive funds).

• Several high-profile companies, including Tesla, Twitter, and Super Micro Computer, have taken advantage of this phenomenon after being added to the S&P 500. 

Why not? See, there’s no doubt that index-tracking vehicles have boosted the wealth of everyday investors. Warren Buffett has said almost everyone should buy a simple S&P 500 index, not individual stocks. Many investors reason that it makes more sense to get the benchmark’s return than conduct hours and hours of stock research with no promise of a market-beating gain.

Taking shape: Yet there are unintended consequences of the passive index boom. These funds buy and sell on autopilot based on benchmark weightings, with little regard to market prices. 

• As one analyst explains, “Thanks to their sheer heft in today’s market, these players, whether they like it or not, are shaping financing decisions in the boardrooms of Corporate America.”

And as the passive boom rages on, there remain questions. 

“The natural next question is to ask: How do firms use this source of financing and additional flexibility in compensation?” one of the researchers noted. “A more likely possibility is that this is neutral — or positive — for firms on average, but negative for firms with bad management or poor corporate governance.”

Read more

More Headlines

📉 Job openings fall to the lowest level since January 2021

⚜️ The countries buying the most gold

💭 Why investors turn to ETFs during times of market stress

♻️ Process to recycle plastics indefinitely being developed at UC Berkeley

🏈 Soaring sports team values create new pressure for owners

💰 The countries that gained the most wealth since 2010

💰 Ultra-Rich Families Set to Control $9.5 Trillion By 2030

The rich keep getting richer. Deloitte predicts the wealth of ultra-rich families will hit $9.5 trillion by 2030. As one might say, that’s a lot of dough.

As high-net-worth individuals gain wealth, family offices continue to grow, rivaling hedge funds. 

According to Deloitte, the number of investment firms designed specifically for the wealthy is expected to grow by about 30% between now and 2030. That would push the number of such U.S. firms to 10,720. 

A lot of wealth: Opening a family office has arguably never been easier or more appealing. (In part, loose restrictions on family offices allow them to compete with hedge funds.) The industry is hiring away professional investors from hedge funds, helping drive more wealth into the hands of the very rich. 

• Larger family offices are taking on roles in the marketplace as activist investors — calling for change in the companies they own, for example.

• Deloitte estimates the average family office has only about 15 employees managing $2 billion in assets. Only one-third of the surveyed were run by someone outside the family.
  

• “It can definitely be risky managing that much wealth,” said a Deloitte research head. “Family offices really need to be careful about who they bring on board.”

Good to know: New York has the world’s largest population of ultra-high-net-worth individuals (UHNW), followed by Hong Kong, Los Angeles, and Tokyo. Last year, the population of people worth over $30 million or more grew by 8%, thanks largely to the stock market rally.

Why it matters:

One report said the ongoing growth in the wealth of the rich means more and more opportunities for financial services tailored to them.

“The market for personal luxury goods and lifestyle services has expanded rapidly, driven by the more varied interests and demands of a progressively diverse global UHNW population,” the report said. “There has been a similar trend across high-end real estate around the world, alongside an increasing focus on family wealth transfer planning and legacy transition amid a surge in first-generation wealth.”

Luxury living: The ultra-wealthy are also pouring their money into luxury spending—about $118 billion last year, or one-third of all global luxury spending—and charitable giving ($190 billion, or 38% of all philanthropy).

Interest rate cuts and emerging growth industries could further power UHNW wealth creation in the next few years. 

• “There will be new and varied opportunities for wealth generation and asset diversification,” the report said. “These will be underpinned by structural trends such as the green-energy transition, advances in digitalization, expanded industrial incentives, rising urbanization and female labor participation in emerging markets, the ‘premiumization’ of consumption, and broadening adoption of generative AI.’”

Feeling richer: Stocks represent a growing share of everyone’s assets, but especially the top 1%. Their soaring stock portfolios make them feel even richer, which has driven consumer spending. 

• “Those households in the top one-third of the income distribution and who own the bulk of the stock holdings account for approximately two-thirds of consumer spending,” one Moody’s analyst observed.

Read more

Together With Brad’s Deals

Get the Most out of Amazon Prime

There was a time when we had to jot down our shopping lists with pens and brave the crowded malls. Then Amazon came along like a shopping superhero.

You're probably enjoying free shipping and exclusive shows, but there's more benefits you might not know about.

Make the most of your membership with these 10 hidden perks.

Quick Poll

On Friday, we asked: Have you noticed a downward trend for salaries at your company?

— Answers were about 50-50. One said, “Yes, and we haven’t had raises in years.”

— Among the readers who said they have not noticed such a trend, one said: “Not yet. I work in automotive aftersales. Sales have been slowing down; aftersales slow down normally comes with a lag.” Another added, “Although numbers do not show a downtrend in salaries, but it doesn't go up as much as the inflation rate. So, as time passes, our buying power will become less and less.”

See you next time!

That's it for today on We Study Markets!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Use the promo code STOCKS15 at checkout for 15% off our popular course “How To Get Started With Stocks.”

Advertise with us.

Follow us on Twitter.

Keep an eye on your inbox for our newsletters on weekdays around 6pm EST and on weekends. If you have any feedback for us, simply respond to this email.

You can also leave your comments/suggestions/feedback anonymously here.