Fewer Investing Opportunities Will Continue to Power Stock Gains
Please note, there will not be any commentary published for the week of 12/30 through 1/3.
Editor’s note: As we approach the end of 2024, I want to show you investment ideas I’ve put forward this year and continue to believe in for 2025. Today, I wanted to highlight this piece from July 7, focusing on the ever-dwindling amount of publicly listed companies. I think that trend will increase over the next four years as M&A picks up under the administration of president-elect Donald Trump. Meanwhile, the amount of assets under management continues to swell, with less avenues to invest.
Fewer Investing Opportunities Will Continue to Power Stock Gains
When supply can’t keep up with demand, prices go up…
In the early stages of my Wall Street career, I worked for and learned from one of the most intense and focused individuals I’ve ever met. His name was Chris. He was hyper competitive, so everything he did had a purpose.
One of Chris’s greatest attributes was that he was always trying to think of where the ball was headed instead of where it was at that moment. His intention for doing this was to try and make sure everyone at our firm was putting that same effort into helping our clients. By doing so, we would help drive their success.
That same passion carried over to his investing. Chris was always studying and surveying the world around him. He was constantly paying attention to the items individuals bought and used in their daily lives. He was always looking for the next big trend and figuring out how to invest in it.
That all came to a head as he was nearing the end of his career. At that time, Apple had come out with the iPhone. Chris was obsessed with it. He could see its exploding popularity. Whenever he came back from a trip to New York, he’d mention how he saw more people using iPhones. He was certain it would become a must-have device, so he started buying the stock.
Finally, Chris decided to retire. He’d had a great career and accumulated a lot of shares in the company we worked for. But soon after calling it quits, he made a decision that changed his life…
Chris was certain of swelling demand for the iPhone would mean growing revenue and margin. And, more importantly, the change would mean demand for Apple’s shares would overwhelm supply, driving the price much higher. So, he sold all his other investments and poured every penny into Apple stock. Within several years, he was worth more than he ever thought possible.
Right now, there’s a similar setup in the stock market. Because less companies are willing to go public, there are fewer opportunities for investors to choose from than we’ve seen in the past, despite a larger pool of funds to invest. The dynamic should underpin prices and act as a steady tailwind for the S&P 500 Index.
But don’t take my word for it, let’s look at what the data’s telling us…
I started my first job in the institutional brokerage industry in the fall of 1995. I had graduated from college that May and was ready to make my mark on the world. At the time, the internet revolution was just getting underway. Individuals and businesses were finding out they had access to data and information like never before.
Pretty quickly, new businesses were popping up. Industries like online shopping were about to change the world. All the technology companies that engaged in providing newfound services needed to raise money to invest in their businesses and people.
So, they went public. By 1996, there were more than 8,000 companies whose shares were traded on public exchanges, according to the University of Chicago. What no one knew was that would mark the peak.
A few years later, the stock market headed south. Investors worried that valuations of tech companies were way ahead of themselves. A lot of businesses did not live up to the hype. They were losing money hand over fist. Some started to go bankrupt.
Money managers lost patience and began selling. As a result, the number of listed companies began to shrink. By 2000, it had dropped to around 6,000 companies listed on public exchanges in the U.S.
The financial crisis made the problem worse. Due to a credit crunch, even more companies disappeared from public exchanges. Between 2001 and 2010, 1,800 companies launched initial public offerings, but during that same span, 3,300 entities delisted. That meant the total number of businesses whose share you could invest in had dropped to about 4,000.
Today, the conversation is still headed in the same direction. Corporate management teams are increasingly worried about the regulations associated with going public. They find it easier and more helpful to stay private. That way they spend less on teams of lawyers and stay out of the public and political spotlight. That has driven the number of publicly listed companies down to about 3,700, or 46% of the total in 1996.
In the meantime, worldwide investment money keeps rising. In 2000, global assets under management were slightly over $35 trillion according to the Boston Consulting Group. By 2010, that number had shot up to more than $56 trillion. A decade later, the total swelled to greater than $104 trillion. And today, it has surged beyond $120 trillion.
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Thought of another way, over the last 24 years, the amount of investment assets has swelled to almost four times the number from the turn of the century. Yet, over that same span, the total number of publicly traded companies in the U.S. have been reduced by more than half. In other words, there is more money available to chase fewer opportunities.
Like I said at the start, when supply can’t keep up with demand, it tends to lead to rising prices. In this case, that’s what’s happening with the preferred investment market for money managers all over the world. There are more dollars chasing fewer shares than a quarter century ago.
And until that changes, it should mean one thing… money will continue to chase the best, most profitable companies in the U.S., with game-changing products. That will support more money flowing into technology investments, underpinning a steady rally in the S&P 500.
Five Stories Moving the Market:
The House and Senate approved stopgap spending legislation to avert a government shutdown and provide more than $100 billion in disaster and farm aid, with President Biden signing the measure into law Saturday morning – WSJ. (Why you should care – the agreement removes another near-term stock-market overhang)-
Federal Reserve Vice Chair for Supervision Michael Barr has sought legal advice to explore his options against any attempts by President-elect Donald Trump to remove him, sources said, the latest sign that a conflict might be looming between the incoming administration and the central bank – Reuters. (Why you should care – Barr has taken a tough regulatory approach since assuming his current role)
Bank of Japan Governor Kazuo Ueda’s newfound caution and the renewed yen weakness it has sparked risks damaging the logic of his campaign to keep normalizing policy in line with developments in the economy; Ueda’s messaging may lose credibility if he ends up raising interest rates largely to protect the yen from further falls instead of moving when economic data supports a hike – Bloomberg. (Why you should care – weak economic data doesn’t support additional rate hikes from the Bank of Japan)
Equity and bond markets are set for gains in 2025 but the big uncertainty for investors will be the policy choices of incoming U.S. President Donald Trump, say Wall Street strategists – FT. (Why you should care – analysts expect the 10-year U.S. Treasury yield to end 2025 around 4.1% and stocks to rally by 10%)
Alphabet's Google proposed a loosening of its agreements with Apple and others to set Google as the default search engine on new devices, in a bid to address a U.S. ruling that it unlawfully dominates online search; the proposal is much narrower than the government's push to make Google sell its Chrome browser, which Google called a drastic attempt to intervene in the search market – Reuters. (Why you should care – an agreement could end the government’s push to breakup Alphabet)
Economic Calendar:
U.K. – GDP for 3Q (2 a.m.)
Germany – Import Price Index for November (2 a.m.)
U.S. – Chicago Fed National Activity Index for November (8:30 a.m.)
Canada – GDP for October (8:30 a.m.)
U.S. – Conference Board Consumer Confidence for December (10 a.m.)
Treasury Auctions $81 Billion in 13-Week Bills (11:30 a.m.)
Treasury Auctions $72 Billion in 26-Week Bills (11:30 a.m.)
Treasury Auctions $48 Billion in 52-Week Bills (11:30 a.m.)
Treasury Auctions $65 Billion in 6-Week Bills (11:30 a.m.)
Treasury Auctions $69 Billion in 2-Year Notes (1 p.m.)
BOC Summary of Deliberations (1:30 p.m.)