Within five minutes yesterday Bloomberg posted two headlines.  The first was “Assets in passive mutual funds now exceed assets in active managed mutual funds.”  The second headline was value/small caps are again outperforming momentum for the third consecutive day, reversing the earlier day trend.   As noted earlier in the week Monday was the greatest disparity between the two in 10 years.

Value has greatly lagged growth/momentum for at least 10 years and August was the worst month for value in at least 20 years according to the financial website FINSUM.

Value/small cap is synonymous to active management.  Momentum is synonymous to passive management.

It is a well know axiom on Wall Street that once everyone is doing the same thing, a significant transition could be immediately at hand.

Passive investing requires no macroeconomic, geopolitical or individual security analysis.  By default it is capitalization driven and the big get bigger and the small get smaller.  Last week a FINRA official stated on CNBC price discovery can be lacking because the current environment.  In other words, passive investors may be paying too much or being paid too little for a wide band of securities.   Wow!

Passive investing was once viewed as one of the various alternatives. Today it is the market that has perhaps created an unforeseen systemic risk.

Perhaps the correct question to ask will this week be significant, viewed as the high level mark of passive investing, equivalent to the high water mark of the Confederacy was Picket’s Charge?  Only history will answer this question.

Little attention was focused on the inflation data which exceeded expectations in all dimensions.

Last night the foreign markets were mixed.  London was down 0.03%, Paris down 0.04% and Frankfurt up 0.12%.  China was up 0.75%, Japan up 0.75% and Hang Sang down 0.26%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.