The conversation around market dynamics has recently taken a provocative turn, particularly following comments made by Michael Green, the chief market strategist at Simplify Asset Management. Green, known for his viral assertion that a $140,000 income now represents the “new poverty line,” has shifted his focus to a potentially more pressing issue: the bubble surrounding passive investing.
In an interview with Business Insider, Green expressed his concerns not about the artificial intelligence (AI) sector, which has garnered much attention lately due to significant sell-offs in software stocks, but rather about the widespread adoption of passive investment strategies. He referred to this trend as a “much more salient” risk to investors, criticizing a scenario that he likens to a “crash of a 1929-type framework.”
Over the last decade, the growth in passive funds, particularly those that track entire sectors or indexes like the S&P 500, has been explosive. As reported by LSEG data, global assets in passive funds have skyrocketed by over 400% from 2012 to 2023, eventually surpassing those in actively managed funds. Green argues that this overwhelming popularity has led to artificially inflated market valuations, estimating that inflows into these passive vehicles may be boosting U.S. stock market valuations by approximately 15% each year, especially among large-cap companies.
“Unfortunately, I think that largely people are being allocated into radically overvalued securities with no real fundamental link to much of the performance that we have seen over the past several years,” Green stated. He further suggested that the current hype surrounding AI could be closely tied to the influence of passive investing.
Looking ahead, Green warned that inflows into passive funds could wane or even reverse. He cited potential triggers for this shift, including increased layoffs that might drive more Americans to liquidate their stock holdings. In a worst-case scenario, he foresees an event reminiscent of the “volatility volmaggedon” that struck markets in 2018, which was characterized by a dramatic spike in the VIX index and the subsequent crash of inverse volatility exchange-traded products (ETPs).
“What causes it to burst is simply a change of direction,” Green noted, underscoring the fragile nature of market sentiment.
In addition to passive investing, Green expressed concern about the private credit market, particularly as it relates to the software sector, which comprises around 40% of all private equity-backed loans. Recent trends indicate a growing level of stock selling driven by fears regarding the impact of AI on software margins. Some commentators have flagged developments in the private credit market as a significant warning signal, or a “canary in the coalmine,” hinting at potential contagion risks that could arise from stress within this sector.
“This is not a small space,” Green cautioned. “Crises tend to emerge from the credit space.” His insights reflect a broader unease about current market conditions and the intricate interconnections between different layers of investing, highlighting the ongoing evolution of investor behavior in a rapidly changing economic landscape.
