As a child I remember learning about the stock market in pop culture with the portrayal of wall street cultural and lifestyles in certain films such as It’s A Wonderful Life and Boiler Room, and more recently in The Great Gatsby and The Wolf of Wall Street. The portrayal of the American Dream growing up was shown to me in a light that business opportunity in the United States was limitless. But are these doors to opportunity slowly disappearing before us? As we continue into this 20-year trend of shrinkage in our public markets, one question loom: Why?
Well, investors are given less startup options to pick from for small companies that offer the highest growth rewards. Thus, they look to the other option of giant companies whose growth has been unparalleled for the last few decades; Amazon, Netflix, Google, Apple and Walmart all come to mind. Investing in these companies seems like a no brainer, leaving the start ups are left with little traction or interest in a public offering. Other than being corporate giants, all the mentioned companies are old in their own regard – meaning the age of companies plays a vital role in success.
The average age of publicly traded companies last year was around 12 years old, while only 22 years ago the average age was around 18-years old, according to the Wall Street Journal. The market has turned to favor private capital investment due to its unregulated and unrestricted nature compared to publicly funded investment regulations and restrictions. Meaning that investors are less likely to discover younger companies now, than they would have been able to in the past when the market contained a significantly higher number of small start-up companies. A common trend in the modern market is for companies like AirBnB and Uber to hold out on going public and pushing back their Initial Public Offerings (IPOs) because of the enormous amount of private equity they have obtained over the years. The regulated public market then has little to offer these already highly funded companies.
Today there are around 4,000 publicly traded companies in the US Stock Market. Yet, just 20 years ago, there were around 7,000 companies with about 3,000 of them being companies that were over 10 years old. In today’s market of 4,000 companies, half of them or around 2,000 companies are over 10 years old. This obvious discrepancy of unequal distribution of start up companies to mature companies could come to unfold against the US economy in the coming years.
Now what does this mean for the average American? It means that the largest corporations that have increased growth over the past 20 years are now able to negotiate huge offers to merge with or buyout companies. 2015 was a record year for the US in mergers with almost $5 trillion dollars in deals being made over the course of the year. So far in the first half of 2018, US businesses have seen over $1 trillion worth of merger deals, according to the New York Times, so it doesn’t look like this trend is going away anytime soon.
Another possible explanation for the decrease in the number of companies can be attributed to the variable of stock buybacks, or when a company uses its investment funds and purchases its own stock. David Rosenberg, Chief Economist and Strategist at Canadian investment firm Gluskin Sheff & Associates Inc said, “When demand for stocks rises but the supply of shares available shrinks, that helps push stock prices higher.”
Meanwhile, years of robust corporate buybacks have reduced the number of shares available to investors. Company share buybacks hit a record of $572 billion in 2015, According to S&P Dow Jones Indices, domestic corporate buybacks peaked at a record $572 billion in 2015. So far in the first quarter of 2018, $242.1 billion was spent in buybacks, while the final second quarter numbers were actually astonishing at around $433.6 billion, according to CNBC.
Practicing policy such as buybacks and increasing the size of corporations and decreasing the number of them seems to be a slippery slope for the market’s future. Financial advisors and corporate finance managers are all highly skeptical of this market trend, many believe it is a sustainable market policy in practice and many believe it is a dangerous trend that will not end favorably for the US economy or the stock market. The implications of this trend will either undoubtedly favor the expansion and growth of large aging corporate enterprises, while there is little to be known for sure on how this trend will play out for the average American in the long run.
Nick Shook is a senior studying political science pre-law at Ohio University. Please note that the views and opinions of the columnists do not reflect those of The Post. Do you agree? Let Nick know by emailing him at ns258814@ohio.edu.
