Typography

Free competition is essential to maintain a fair and balanced market. No one side - labour or capital, can have ascendancy or abuses of power occur. Over the last 30 years we have seen MegaCorps are buying up smaller companies and in so doing, are growing their own power. The TPP is the result of the ascent to power of MegaCorp - an agreement to put them above the law...

AWealthofCommonSense: There are a number of reasons cited for the fact that active fund managers have had a difficult time beating the markets over the years — higher costs, more trading activity, closet indexing, mis-timing the market, a shift to index funds and more highly-skilled investors, to name a few.

Here’s another theory to add to the list — the shrinkage effect. Not only are there more skilled players than ever looking to uncover sources of alpha, but there are also far fewer stocks to choose from, at least in U.S. markets.
The Wilshire 5000 Index is designed to track the performance of the entire U.S. stock market. It doesn’t cover over-the-counter, thinly-traded stocks or private companies, but it gets you about 98% of the way there for coverage of the entire U.S. stock market. According to a report from index provider Wilshire Associates, the number of stocks in this index have been on the decline for a number of years.

Developed in the summer of 1974, the yet to be named Wilshire 5000 Equity Index had just shy of 5,000 issues — thus the number 5,000 was made part of the name to convey the breadth of the index’s coverage. The Wilshire 5000 membership count has ranged from 3,069 on February 28,1971 to 7,562 on July 31, 1998. Since then, the count has steadily fallen to 3,776 on December 31, 2013 before climbing to 3,818 as of September 30, 2014. The last time the Wilshire 5000 had more than 5,000 companies was December 29, 2005.

The graph is the image above.

If you want to really boil down the reason for stock market moves over time it comes down to supply and demand. The remarkable thing about the 80s and 90s bull market is that the number of stocks in the index was rising the entire time. It wasn’t until right around the peak in the late-90s that the number of names started to fall dramatically. The total number of stocks has been cut in half since the high reached in 1998.

There are many reasons for this occurrence. There have been a number of mergers and acquisitions along with the fact that businesses do fail on a regular basis. But another reason is that private companies aren’t choosing to go public nearly as much as they once did in the past. From 1980 to 2000 there was an average of more than 300 companies every year that went public. Since then that number has dropped to an average of around 150 a year. Many blame regulations such as the Sarbanes-Oxley Act from 2002 for the reason more private companies are delaying going public for as long as they can.

Two recessions in a decade and the short-term pressure to perform well on a quarterly basis haven’t helped either. You can see the effects on the IPO market in this graph from Renaissance Capital:

IPOs

H/T David Stockman

 

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