November 24, 2019

Why Markets Rise as Discourse Falls

Beginning with the Bottom Line:


Markets hover near all-time highs while political discourse plumbs all-time lows, creating confusion among many of our investors.  To reorient disoriented investors, it’s important to get reacquainted with the true masters of market activity.   The combination of rising structural stock market demand from corporations paired with institutions directed by longer-term asset allocation mandates, more than offset household investor histrionics.  In other words, the cocktail party stock market debate may be interesting, but it doesn’t move the markets.     



The Full Story:


For those exasperated by the impeachment and campaign proceedings, good news! I have no interest in commenting on either.  Markets do pay attention to these things, but not as much as you think.  Recently, a media-bludgeoned client asked me how the stock market can keep rising when all of his golf buddies seem to be selling.  Good question!


While individual household investors buy and sell regularly on emotion, they actually account for very little of daily activity.  The vast majority of stock market transactions stem from institutional investors and the corporations themselves.  For context, the value of the entire US stock market totals around $32 trillion.  Collectively, listed companies generate nearly $1.5 trillion in total yield for their shareholders, which largely gets reinvested.  These corporations also regularly execute mergers and acquisitions actions, which will total around $2 trillion in 2019.  These corporate sources of demand apply structural upward pressure on stocks.   Meanwhile, the overall market supply has been shrinking.  As seen below, the combination of corporate stock buybacks plus mergers and acquisitions well exceeds the new equity issuance of IPOs and the issuance from secondary offerings.



Therefore, the actual supply of stock market shares has systematically declined at an accelerating rate over the past two decades.  In fact, the total number of US-listed companies has fallen from 8,000 in the late 1990s to around 4,000 today.  Fewer listings and less stock market supply adds structural upward pressure on stock prices.


Next, we have the institutional investor community, which includes corporate retirement funds, investment advisors like W&A, and other professionally managed asset pools.  Many Wall Street commentators refer to this group as the “smart money,” and while this capital does buy and sell, it does so at a slower pace than most golfers.  Institutions control roughly 80% of total stock market capitalization and answer to longer-term asset allocations rather than shorter-term in or out compulsions.


Lastly, US golfers actually own very little of the stock market.  In fact, 50% of US households own zero stock market assets.  Of those that do own stocks, the top 1% of US households own 50% of the household ownership total.  American households today own less of American stock market capitalization than foreign investors.


In sum, the US market has a structural upward bias, given shrinking supply and rising corporate demand.  “Smart money” institutional investors that account for 80% of ownership do influence trading direction, but they have longer-term mandates that insulate them from binary daily decision making.  Therefore, household investment vagaries only account for a tiny portion of daily market activity, and of those households, the top 10% account nearly all of the equity ownership.


Have a great weekend,


David S. Waddell 
CEO, Chief Investment Strategist 


Sources: St. Louis Fed, New York Times, Financial Times, Bloomberg, Yardeni, World Bank, International Bank of Settlements


Author Image

David S. Waddell


Chief Investment Strategist

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