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 drive 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 had launched initial public offerings, but during that same span, 3,300 entities had 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 advantageous 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.

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:

France faced potential political deadlock after elections on Sunday threw up a hung parliament, with a leftist alliance unexpectedly taking the top spot but no group winning a majority – Reuters. (Why you should care – the lack of a majority by Marine Le Pen’s euro-skeptic party would support a rally in the euro, boosting the prices of dollar-denominated assets)

Jerome Powell is likely to tell lawmakers that Federal Reserve officials need further confirmation inflation is slowing before they’re in a position to cut interest rates, even with evidence building of softer growth and employment – Bloomberg. (Why you should care – investors will be parsing Powell’s commentary for clues on when the first interest rate cut could happen)

The Labor Department reported the unemployment rate ticked up to 4.1%, a sign of slack in a labor market that has already shown some hints of gradually slowing down – WSJ. (Why you should care – rising unemployment could cause the Fed to cut interest rates by September to support the job market)

Federal Reserve Bank of New York President John Williams said that while inflation has cooled recently toward the Fed’s 2% target, policymakers are still some distance from their goal; the policymaker reiterated his conviction that interest rates are in the right place to bring inflation back to the 2% target – Bloomberg. (Why you should care – Williams isn’t voicing a need for rate hikes)

China's central bank said it would start conducting temporary bond repurchase agreements or reverse repos to make open market operations more efficient and keep banking system liquidity ample – Reuters. (Why you should care – the government in Beijing is pulling levers to support economic growth)

Economic Calendar:

Japan – Wages for May

Germany – Trade Balance for May (2 a.m.)

Eurozone – Sentix Investor Confidence for July (4:30 a.m.)

BOE’s Haskel Speaks (7 a.m.)

NY Fed Consumer Inflation Expectations (11 a.m.)

Treasury Auctions $76 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $70 Billion in 26-Week Bills (11:30 a.m.)

Consumer Credit for May (3 p.m.)