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Money Managers Not Fed Drove Market Up
GRAND RAPIDS — If you think the Federal Reserve’s half-point rate cut on April 18 was solely responsible for the Dow Jones Industrial Average surging by nearly 400 points, then you’re only partially right.
You might be surprised to learn that the overwhelming desire held by competing money managers not to finish second in the money wars was more likely the main catalyst for the climb. It’s a climb that, by the way, may help investors rediscover an old-economy trait — that earnings actually mean something.
According to money manager Eric Erickson, who also teaches finance at Grand Valley State University, the biggest players in the investment game are institutional managers and fund managers.
The institutional managers guide the large pension plans, which are worth about $7 trillion, and are from the old economy — meaning they look for earnings, genuine PE ratios and steady growth when they buy a company’s stock. The fund managers guide the 401(k) plans, worth around $6 trillion, and bet heavily on the growth potential of the new economy.
Erickson said fund managers sparked that growth by buying IT and dot-com firms before these were profitable, and their action raised the prices of these stocks — but without the usual old-economy earnings that institutional managers demand. Well, it now looks like a coup took place a few weeks ago and the pension managers are back in charge.
“The market I’m seeing is the institutional guys, the big-money guys, because they’re the ones doing the math. They’re only going to buy companies that are growing,” he said. “The mutual fund managers, who are really like politicians with an election every day, have to make their voters, or shareholders, happy.
“The mutual fund guys jumped on these hot stocks and drove them higher. The pension managers were sucked into it because they didn’t have a choice. They didn’t want to get fired, either.”
This time around, however, Erickson said executives are going to have to show money managers a growth of 10 to 15 percent each year if they expect their company’s stock to be bought. And with interest rates down, he said these executives should look at the next six months as the appropriate time to make moves that could lead to growth for their firms.
As for the money managers, Erickson said neither the institutional nor the fund manager wants to be a runner-up on Wall Street.
“The mutual-fund managers are terrified of finishing out of first place. So you always see this advance movement among them where they feel they have to get in there. They feel if they don’t buy now, it will be too expensive in six months. Then their numbers won’t look good and their shareholders, who are funding them, will fire them.
“It’s really a neat system because under it you’ve got to be first,” he added. “It seems so complex because it’s such a huge economy. But at the heart of it are these people who don’t dare be second because they’ll get fired.”
Also, Erickson doesn’t believe that the Fed cut the prime to make investors happy. The agency’s action, he said, was an effort to pump up a flat economy, which didn’t grow in the first quarter.
“Everyone missed that point. The reason why we got that cut is the Federal Reserve said we were teetering on a recession.
“Why did you see the huge move in the market when the Fed cut the rate? It wasn’t that life suddenly got better,” he added. “It came on the chance that things will be good in six months, and the managers don’t want to be left behind.”