Bare Shelves

By Matthew Gutierrez and Shawn O'Malley · July 22, 2024

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Happy Monday! Let’s kick off the week with some stats that highlight the growing wealth of American households.

Imagine this: Nearly one in three Americans now holds a stock portfolio valued at over half a million dollars. That's right – 30% of the population has equity investments worth more than $500,000. And 37% of Americans own homes valued above the same threshold.

The upshot? A big tailwind for consumer spending. Homeowners and equity investors are enjoying their new levels of wealth as air travel and restaurant spending hit record highs this summer.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Where are all the good stocks?
• Buffett trims Bank of America stock

This, and more, in just 5 minutes to read.

POP QUIZ

Warren Buffett made his first investment in Bank of America in 2011, when the stock was trading at under $15 a share at a time bank stocks were under pressure due to the U.S. government's debt-ceiling crisis. What is his oldest current stock holding? (Scroll to the bottom to find out!)

Chart(s) of the Day

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In The News

Where Are All of The Good Stocks?

Low interest rates have traditionally been widely viewed as beneficial for stocks — just ask small-cap fund managers lately.

But their impact on the stock market is more complex. And this is worth paying closer attention to as the number of publicly traded companies has decreased drastically.?

Zoom out: We all know the current market is dominated by a handful of large tech companies like Nvidia, Microsoft, and Apple, which have driven much of the recent gains. The top-heavy market structure is reminiscent of the 1994-99 tech boom, when the S&P 500 outperformed small-cap indices by a mile.?

• Historically, investors seeking diversification during such periods have turned to small-cap stocks. But the latest bull market has made this strategy less effective. The number of stocks in broad market indices has declined dramatically. For example, the FT Wilshire 5000 Index now contains only 3,381 stocks, far fewer than its name suggests.
• Consider that there are roughly three times more stock funds than listed American companies to invest in. Although 70% of the world’s stock market value is American—including all 10 of the most valuable firms—under 10% of listed worldwide companies are American, less than half the proportion of the 1990s tech boom.

Cheap debt, baby: This shrinking pool of public companies is partly because of prolonged low interest rates and the rise of index funds, which have made smaller U.S. companies attractive acquisition targets.

• As a result, many profitable small companies have been bought out by larger corporations or private equity firms using cheap debt. If rates were a bit higher, they’d be much harder to do so.
• And, because the remaining small-cap stocks often have lower profit margins than historical norms, they’re less attractive investments. Traditional valuation metrics can be misleading, as many small-cap companies are unprofitable and thus excluded from certain calculations.

Explained: Low interest rates make it easier and less expensive for larger companies or private equity firms to borrow money to fund acquisitions, which allows them to pursue more deals and potentially pay higher premiums for smaller companies.

• And, with low yields on bonds and other fixed-income investments, acquirers look to small-cap stocks to generate higher returns. Smaller companies can have more growth potential, making them appealing targets.
• So, because of prolonged periods of low rates, many small-caps firms have been acquired, reducing the overall pool of available investment options. Meanwhile, low rates fueled private equity activity, with firms using cheap debt to finance leveraged buyouts of promising small-cap companies.

Why it matters:

Many big tech companies are at or around all-time highs, the market is generally viewed as fairly expensive right now, and a lot of investors are asking...