In the past, we have written about the concept of competition for capital as a fundamental driver of asset class returns. Absolute valuation, relative valuation, growth outlooks and specific catalysts all play a role in how attractive one asset class is versus another. Over the past several years, low interest rates have created conditions whereby the yields on traditionally conservative investments such as cash equivalents and fixed income have forced investors into riskier asset classes, such as stocks, in search of required returns. Steadily improving economic conditions off the financial crisis bottom have also contributed to investor’s confidence in equities and helped grease the market’s wheels.
However, there is another phenomenon at play that could be propelling equities and it is as old as economics itself, the law of supply and demand. According to a 2016 research report by Steven DeSanctis of Jefferies and Company, the number of stocks in the commonly cited University of Chicago Center for Research (CRSP) database has steadily shrunk from a high of roughly 6,500 back in 1996 to less than 3,500 by the end of 2016.
Stock buybacks and merger activity (both fueled by low borrowing costs) have reduced inventory. In addition, increased public company scrutiny and higher regulatory burdens have resulted in a lack of initial public offerings (IPOs). In fact, according to a report by Michael Mauboussin of Credit Suisse, “The propensity to list is now roughly one-half of what it was 20 years ago”. Not surprisingly, according to CB Insights, the number of venture capital backed private companies in the world valued at over $1 billion (called unicorns) has risen to 216, with a cumulative valuation of $754 billion. How many interviews of these companies have you watched where the founder asked the interviewer, “Why would I want to go public?”. All of this has occurred at a time when demand from investors for equities is high. The result has been a steady underpinning of strong demand and limited supply which at least partially explains the lack of volatility and the quick buying of the market’s dips.
The point in all of this is that investors are flooded with complicated, minute by minute theories about why markets are doing this or that. On a day to day basis if you pay too much attention to all of the noise, you can miss the forest through the trees. It is helpful, therefore, when reviewing your investments to revisit the basics from time to time and there is nothing more basic in economics and asset price movement than supply and demand.
John Micklitsch, CFA, CAIA, is the Chief Investment Officer at Ancora Advisors LLC a SEC Registered Investment Advisor.
The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.
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