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Supply and demand in the stock market

Supply and demand in the stock market
Supply and demand in the stock market


A reader asks:

You recently cited Slock in two podcast episodes that private equity firms, those with more than $100 million in revenue, make up 87% of that category, compared to just 13% of publicly traded companies which fall into the $100 million revenue category, and that figure. only increases.

That said, is this ONE of the reasons why stock prices seem to continually rise. As the number of private equity firms continues to rise, there are fewer publicly traded companies, so more money to chase the ever-decreasing number of public companies?

Here is this statistic from Apollo Torsten Slok:

Atlantic shared some data on the decline in the number of publicly traded stocks as well as the corresponding growth in private equity investments:

The publicly traded company is disappearing. In 1996, approximately 8,000 companies were listed on the American stock exchange. Since then, the national economy has grown by almost $20 trillion. The population increased by 70 million people. And yet, today, the number of American public companies stands at fewer than 4,000. How is this possible?

One answer is that the private equity industry is eating them up.

In 2000, private equity firms managed about 4% of total U.S. corporate equity. In 2021, this figure was closer to 20%. In other words, private equity has grown nearly five times faster than the U.S. economy as a whole.

Private equity managed less than 1 billion dollars in the mid-1970s. Today, that's more than $4 trillion. There are more than $2.5 trillion in dry powder alone at the global level:

Private equity now occupies an important place in the U.S. and global economy.

Here's a look at the declining number of public stocks in the United States via Barron's:

We've gone from over 7,000 titles in the mid-1990s to over 3,500 today. The number of state-owned enterprises has been reduced by more than half.

The Wilshire 5000 is more similar to the Wilshire 3500. The Russell 3000 currently has only 2,689 stocks.

We have reached the point where indexes look like false advertising.

From a purely supply and demand perspective, it would make sense that more dollars for less inventory would drive prices up.

But there's a lot more going on here. We also need to look at the types of businesses that have disappeared.

This rise in the number of new companies during the 1990s was something of an aberration of the dot-com bubble. These were mainly small, micro-cap companies.

Vanguard shared the data on this with Institutional investor few years ago:

Rowley says the proportion of large-, mid-, and small-cap companies that make up the overall market capitalization has been very consistent since 1979. He says many analysts have made 1996, which had a record number of public companies, a point-of-point year. de facto anchor. However, in the late 1990s, markets were at a high point, with many companies eager to go public and take advantage of high valuations.

“If you look at the general trend of history, there is an increase in the number of public companies up until 1996, and a decrease from that point on,” Rowley says. “But again, this is almost exclusively the domain of micro-cap stocks.”

In 1979, there were 2,044 public microcap companies. In 1997, there were 4,193 and in 2014, 1,549. But they represent only a small part of the publicly traded universe. In 1979 and 1997, micro-caps represented 3% of the market. In 2014, micro-caps represented 2% of the market. Micro-caps fell to 1% in 2016.

Most of these microcap companies from the 1990s ended up going bankrupt because they had no business model or fundamentals. They were looking to capitalize on the euphoria at a time when there wasn't as much money in venture capital or private equity.

And micro-cap companies represent only a fraction of the U.S. stock market from a market cap perspective.

Holding ten dollar bills doesn't put you in a better position than the person holding a single hundred dollar bill.

Of course, there are some smaller companies that investors have missed due to increased venture capital, M&A, and buyout activity. But you could argue that the remaining companies are now better quality because of it.

Michael Mauboussin wrote a paper on the decrease in the number of shares in 2017, making exactly this argument. Here is the main takeaway from this report:

As a result, listed companies today are on average larger, older and more profitable than they were 20 years ago. Additionally, they operate in generally more concentrated sectors. The overall size and maturity of listed companies means they are more likely to pay cash to shareholders in the form of dividends and share buybacks than companies have been in the past.

We believe that the maturation of listed companies has also contributed to the informational efficiency of the stock market. It is probably more difficult to gain an advantage in older, well-established companies than in young companies with uncertain prospects. In turn, greater efficiency could be one of the catalysts for investors moving from active to index or rules-based strategies.

It makes sense that this has created an environment in which it is now more difficult to outperform the market.

There are many reasons why the stock market rises over time.

The number of shares listed on the stock exchange is not one of them.

We discussed this question in the latest edition of Ask the Compound:

Barry Ritholtz joined me on the show this week to answer questions about the real inflation rate, how fiduciary duty works, concerns about U.S. government debt, and whether we'll see a flood of homes coming onto the market when the baby boomers start to die.

Further reading:
The renaissance of the IPO




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