In 2006, the Bush administration passed the Pension Protection Act, which automated the American retirement plan, 401(k). Whereas Americans had previously been able to decide voluntarily whether or not to join the pension plan, after the new law was introduced, they had to explicitly state if they did not wish to do so. And since most people hardly ever check their contributions, participation in the program rose from 20% to 70%—an enormous cash injection for the stock market. Since in most cases 401(k) is a passive investment concept, i.e., the image of an index is purchased rather than stocks carefully selected through fundamental or technical analysis, the US stock market rose and continues to rise exorbitantly.
The danger is that if, for demographic reasons (declining US population, aging society) or economic reasons (higher unemployment), less money is thrown into the market, the market will begin to decline at a rapid pace as exorbitant sales are made.
Yes, there are numerous sellers of financial products who are currently dazzling us with their positive attitude toward the US economy. However, the stock market is completely overheated, especially in the US. At the moment, it is reminiscent of the dot-com bubble of 2000, especially since passive investment concepts now account for over 50% of the entire US stock market.
In addition, such concepts lead to large corporations being weighted more heavily due to automatic purchases. The best example was and is The Magnificent Seven, a stock index of seven large technology companies—Alphabet (parent company of Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla—that have, or rather had, a dominant position, as Nvidia currently dominated them all. The market became narrow. If Nvidia falls, they all fall with it. In Europe, it is no better: in Germany, SAP, Siemens, and Airbus alone account for 30% of the weighting among the 40 DAX companies – which, incidentally, also facilitates manipulation of the DAX by large speculators.
One thing is certain: automated investment processes are stupid; they also mean that when a bubble bursts, there will be hardly any time to react accordingly.
