A Zombie Stock Market Races Toward the Inevitable

Money is leaving active management and pouring into passive vehicles like ETFs. What will cause it all to come down? You get three guesses, and the first two don't count.

Editor’s Note: In the previous version of this article (including the email) there was an omission of a key transition line to explain the connection between ETFs and liquidity events. It has been added.

Dear Fellow Expat:

One of the biggest problems for bears—the ones who predict a 25% to 50% drop in the equity markets—is the structural change in U.S. equity markets over the last decade.

While the newsletter business was full of calls about Nvidia (NVDA), Palantir (PLTR), and Tesla (TSLA)—which we highlighted in September before the election as oversold—the markets did what they do on repeat.

Last year, investors poured another $1 trillion into the Exchange Traded Fund world – bringing the passive investment total in ETFs to a stunning $10.6 trillion. Here’s the chart from ETFGI data via Chartr and Sherwood News.

All the while, investors pulled $450 billion out of actively managed stock funds, outpacing the outflows of $413 billion the year prior, according to EPFR. The markets are on a…