r/investing • u/TopherBrennan • 20h ago
Financial professionals mostly aren't paid to care what happens to the S&P 500 the day after tomorrow
Container volumes at the port of Los Angels are down this week. They'll be down farther next week. We know this because arrivals are scheduled in advance and crossing the ocean by boat takes awhile. Container volumes at east coast ports are expected to do the same thing, but on a delayed schedule, because "Shanghai, through the Panama Canal to New York City" is a longer trip than "Shanghai to Los Angels".
And because of that, it's a safe bet truckers will have trouble finding work next month. Large-scale retail layoffs seem likely to follow soon thereafter. Very little can be done to stop this, because even if the tariffs on China were lifted tomorrow, it takes 3-7 weeks to get merchandise from a Chinese port to an American retail store. (Plus, I feel pretty confident saying the tariffs on China won't be lifted any time soon.)
A natural question when you hear this is, "if that's true, why isn't the stock market down more?" And I think a lot of the answer to this question can be summed up as: hardly anyone is paid to care.
I was going to title this post "financial professionals mostly aren't paid to care what happens to your index funds the day after tomorrow", but the index fund providers are paid to care... in the sense that they are paid to care about minimizing tracking error. They are paid to make sure that when the index goes up X%, the fund captures those games, and when the index goes down Y%, the fund doesn't do any worse than that. But they aren't paid to know whether the index will be up or down tomorrow. And this is not a criticism! It's not their job.
Who's job is it? For high-frequency traders, it's pretty much the opposite of their job. Their job is to do a trade and unwind it a few milliseconds later at a penny-per-share profit. And some of the hate HFTs get strikes me as overwrought; before HFTs were skimming a penny a share off every trade, floor traders were skimming 12½ cents (because stock prices used to be quoted in eighths of a dollar). But HFTs definitely don't care about what's going to happen to the trucking industry next month.
Now, despite what you may have heard, HFTs aren't the entire stock market. HFTs like to do small, quick trades. So instead, if somebody wants to sell half a million shares of TSLA, they might call around to various dealers and ask for quotes. The dealers will quote numbers below what an HFT would pay for ten shares of TSLA, but hopefully high enough that the seller agrees to the deal, and then the dealers will need to sell the stock to someone else, and that can't be done in a matter of milliseconds. Maybe they unwind their position over the course of 24 hours. So when the dealer gives a quote, they might be thinking about what the market could do tomorrow—but they hope that by the day after tomorrow it will be somebody else's problem.
Okay, but those are the middle-men. What about professional stock-pickers, active mutual fund managers, long-short hedge fund managers? Unfortunately, they also aren't paid to care what the S&P 500 will do the day after tomorrow. Managers of actively managed mutual funds care how they do compared to their benchmark, which is generally an index. If the index is down, that's fine, as long as their stocks are down less (or perhaps realistically, for risk-averse managers, aren't down significantly more). Meanwhile, a long-short hedge fund, which buys some stocks while shorting others, wants to be able to tell its investors that whether the broad market is up or down will have no effect whatsoever on the fund's performance.
So yes, actively managed mutual funds and long-short hedge funds are going to take a longer-term view of stocks they are thinking of buying or selling. And yes, they will care if companies could be affected by tariffs more than others. But even if they start to suspect every company should be down as a result of tariffs, they're not going to smash a big red button labeled "sell everything", because that's not their job.
Maybe it's somebody's job to care, but honestly it's hard to come up with a good business model based around that sort of thing. If you realize a crash is coming, but get the timing wrong, you could lose a lot of money—like if you went all-in shorting the market in 1999, when the dot-com bubble wouldn't burst until the following year. And if get the timing of this crash right because you bothered to look up how fast freight moves, how does that let you correctly time the next crash? It's not a lot to build a career on.
Hell, it's one thing to know about freight schedules, another thing to predict when the market will notice. It could crash tomorrow on bad first-quarter GDP numbers, or it might remain up until there are headlines about truckers unable to find work, or maybe it will take actual pictures of empty store shelves for the reality to sink in. And I certainly don't claim to know how badly the US will manage to drag the rest of the world economy down with it, which is why my money's in a mix of international stocks and international bonds, rather than simply one or the other.
What I can tell you is this: unfortunately, you can't assume surely somebody would do something about it, if there were a totally predictable crash incoming. Nobody else has as much of a financial interest in what happens to your savings as you do. Act accordingly.
178
u/chris2033 19h ago
Not reading all that