The Incredible Shrinking Stock Market

In just a little more than 20 years, the declining number of public companies shrank from more than 7,400 to less than half that number.¹ (Fun fact: The Wilshire 5000 Index is comprised of less than 3,700 stocks.)

Amid a historic bull market and one of the longest stretches of economic expansion, it seems counterintuitive that the stock market is home to fewer companies than two decades earlier. Mergers, delistings (predominantly of smaller companies) and a decline in IPOs are the primary reasons for this.

Should Investors Care?

Mergers, which are a natural response to an increasingly competitive global marketplace, and delistings, which are part of the Darwinian process of a capitalist system, are less worrisome. More concerning is the decline in the number of IPOs. Increased regulations and added costs, along with the perceived focus by Wall Street on short-term earnings, have been major deterrents for young companies to list their stock on a public exchange. When coupled with the wide availability of private capital, the urgency to go public diminishes.

This hesitation has real world consequences for investors. This delay in going public means that average investors have less access to the real innovators in our economy, reducing the opportunity to profit from their growth.

To illustrate this, consider the Amazon IPO in 1997, where initial investors made 565 times their money after three years. Compared to the IPOs of Google and Facebook, which went public already as large capitalization companies, IPO investors saw a 20 times growth after six years and 3.7 times jump after five years, respectively.²

How Investors Need to Respond

As the public market shrinks, the ability to create alpha becomes more difficult, with undiscovered or overlooked information becoming increasingly rare. Investors will need to consider new ways of constructing portfolios beyond the traditional equity markets, including:

• Tapping private equity investment opportunities
• Adding low correlation strategies
• Investing in vehicles that target operationally-focused buyouts, specialist turnarounds or other such approaches

Investment professionals will play a crucial role in educating clients to the changing face of the public markets and the need for a responsive portfolio strategy. The “active versus passive” debate may have been rendered moot, with a much more relevant question now hanging over investors: “Has your portfolio evolved and adapted to a new investment landscape?”

Sources:

1. https://www.wsj.com/articles/fewer-listed-companies-is-that-good-or-bad-for-stock-markets-1515100040
2. https://www.cnbc.com/2017/10/25/where-have-all-the-public-companies-gone.html

See referenced disclosure (2) at https://blog-dev.americanportfolios.com/disclosures/