Earlier quoted context omitted.
> If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? The stocks will still take a hit, as we saw in the case of 2008 almost everyone loses money in a market-wide drop. Many active traders went bankrupt as well, the S&P500 lost 50% of its value but didn't go to 0. > Of course if it gets bad enough for companies to go broke, that could go wrong for the pa…
so the difference I thought there might be now, as compared to 2008 is the percentage of funds that are passively managed. If a proportionately smaller percentage of stockholders are selling then it seems possible/likely that any price swing will be smaller. One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote.…
Luckily I was able to find an excellent resource that dives into the exact questions we're discussing: https://www.bis.org/publ/qtrpdf/r_qt1803j.htm
It also makes a note that a lot of active investors allocate funds into a weighted index basket to better match index returns, so it could be that both active and passive funds are contributing to the same price insensitivity.
As a final supplemental to the paper given above I also looked at the PE ratio of the S&P500 per year: https://www.multpl.com/s-p-500-pe-ratio/table/by-year
One thing I would also expect is that as passive investing becomes a larger and larger part of the market we should also see the PE ratio rise.
I found a site that gives the PE by year (https://www.multpl.com/s-p-500-pe-ratio/table/by-year) and calculated the following (2019 estimates removed).
For all the years 1871 to present: AVG. 15.7 Median. 14.775 STD Dev. 7.25
For 1980 to present: AVG. 20.72 Median. 18.15 STD Dev. 11.18
PE ratio for 2018 was 24.97, which is very high for all of history but seems reasonable for 1980 to today.