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Where Have the Stocks Gone?
By: Eric Ramos, CFA, Institutional Consultant
Much has been made of the current bull market and record market highs. Since the market low of March 2009, the Dow Jones Total Stock Market Index has appreciated 317%. While those impressive gains have been well-received by all, an emerging trend has largely been overlooked during the prolonged market rally. Since the market bottom in 2009, the number of stocks within the Dow Jones Total Stock Market Index has declined from 4,535 to 3,810. While the average value of a publicly traded company has skyrocketed, the number of publicly traded companies has decreased. According to the University of Chicago, the average size of a U.S. public company swelled to an all-time high of $4.7 billion in 2014 before dipping slightly in 2016.1 One cause of this meaningful increase in size coincides with fewer companies for investors to place their assets and company mergers and consolidations. With the average public company three times as large as it was in 1997, the inflation-adjusted total capitalization of the U.S. public market is reaching peak levels. Two important questions consequently emerge; why has the number of stocks continued to decrease and how does this trend impact an investor in this market environment?  

The decline in U.S. stocks has resulted from fewer IPOs, more buyouts and richer valuations in the private markets. USA Today noted, “The supply of new stocks is drying up as new companies are reluctant to sell shares in initial public offerings and choose instead to remain private. Meanwhile, large companies are aggressively buying smaller companies with interesting technology or market segments so they can tap into instant ways to grow.” Increased costs of public companies coupled with a stricter regulatory environment has made it less appealing for companies to go public. Larger companies with excess cash are finding strategic buyouts of smaller companies to expand operations. Lastly, in this low interest rate environment, private investors are able to access cheap money to keep a company private.  

What are the implications for an investor today? It is important to accept that today presents a vastly different stock market than 10, 20 or 30 years ago. Fewer listed stocks and significantly larger, older companies have led to more concentrated sectors and in turn, greater analyst coverage. We frequently apply the efficient market hypothesis, the theory that states stock prices reflect all available information to large cap stocks where analyst coverage is robust. With fewer public companies, and presumably robust analyst coverage of existing companies, will there be a time where we apply the efficient market hypothesis to more than just large cap stocks?  

Private equity funds focused on the middle market may provide investors a complement for small cap exposure, particularly as the number of public companies continues to shrink. Given the significant change equity markets have experienced, especially pronounced since the financial crisis, the opportunity for newer ideas in public equities have become fewer and farther between. This evolution, however, has opened the door for new opportunities within a more niche, inefficient segment of the market, led by private equity. The lack of transparency surrounding private markets presents significant opportunity for specialized managers to not only add return to portfolios but also enhance diversification. Though we always strongly encourage a comprehensive review of all associated risks with any asset class, we believe private equity offers investors considerable upside over the next market cycle.

Please contact any of the professionals at DiMeo Schneider & Associates, L.L.C. to discuss the current state of the market and potential asset class considerations.
1 Farrell, Maureen. “America's Roster of Public Companies Is Shrinking Before Our Eyes.” The Wall Street Journal, 6 Jan. 2017, www.wsj.com/articles/americas-roster-of-public-companies-is-shrinking-before-our-eyes-1483545879.
While this article addresses generally held investment philosophies of DiMeo Schneider & Associates, L.L.C., it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.

This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited.  
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