The stock market is having a heck of a year with the Dow Jones Industrial Average bumping up against its all-time high. That’s great news for small investors who have won back some of the hideous losses they suffered in the 2008 meltdown. So, why is the market flying so high? True, the economy is on a steady upswing, but it’s hardly roaring. Job growth is so-so, and we still have an unemployment rate close to 7.5 percent. Housing prices have recovered dramatically but are at a similar level to what we saw in 2003.
We believe current stock prices are being driven in part by simple supply and demand. There are fewer stocks on the market and more money chasing them.
The number of publicly traded stocks has been cut in half over the past 15 years. In 1998, there were about 8,800 stocks trading. Today, there are only 4,900. The Wilshire 5000 Total Market Index, which was created to track the performance of every publicly traded stock, now contains just 3,962 equities.
Why is this happening? Several reasons, many related to the two recessions (2001 and 2007-2009) that we have experienced in the last decade and a half. A multitude of publicly traded companies have just plain gone away. Remember Pets.com, Enron, MCI WorldCom, eToys, and Webvan?
Many public companies have gone private. In the United States the value of “take private” deals jumped from $14 billion for the whole of 2012 to roughly $80 billion by early August this year. Dell, HJ Heinz and Levi Strauss are just three recent examples of this trend.
The tougher economic environment has also prompted more mergers. Just this month US Airways and American Airlines got final approval to merge.
Initial Public Offerings are down. While some recent IPOs -- Twitter and Facebook -- have generated lots of media coverage, there have been fewer IPO offerings in recent years -- just 120 in 2013. (approximately 388 new companies a year are needed to keep the number of publically traded stocks “level”, and we have averaged far less than that since 2001).
The average share price on the S&P 500 is at a record high of about $75. One factor might be the soaring prices of such hot stocks as Boston Beer ($240/share), Chipotle ($534), Mastercard ($732), Panera ($166), and Netflix ($333/share).
Traditionally, when a stock achieved those heights the company would introduce a stock split to make its shares appear more affordable to individual investors. In a 4-for-1 split, for example, a company with 10 million outstanding shares trading at $400 per share would end up with 40 million priced at $100.
Stock splitting has fallen out of vogue because the big, popular companies don’t really care about attracting “small” investors; they want institutions to invest in their companies, and institutions have no issue paying the higher per-share price.
And where is the money coming from to fuel the demand side of this equation? True, private investors are returning to the market after licking the wounds they suffered in 2008 and 2009. But a key driver may be foreign institutional investors, who still view the US as a safe and stable place to invest. It is also no secret that the Federal Reserve, since 2008 has continued to pump money into our economic system which has in part, kept bond yields very low making “stocks” that much more attractive to investors. Public companies themselves are also key players in the market with the most successful firms buying up their own shares on a regular basis.