Published March 19, 2021
These days it seems there is a high level of financial investment activity going on. Witness the recent Congressional hearings about the online-driven mania in Gamestop and other “meme” stocks. We cannot remember a time when individuals trading stocks were brought before Congress. Every week there is a new acronym, new concept, or new purported “bubble” taking shape. We will take this space this week to describe, define, and digest some of the major new areas in the investment world.
First up we will talk about “going public”, the term that describes a company issuing publicly traded stock for the first time. Not a new term or a new area of investment, but one that feels like it is hitting a higher level. For the past 20 years or so, the number of stocks trading in the stock market has been shrinking. The broadest market index, the Wilshire 5000, no longer has even close to 5000 stocks. It only has about 3500 stocks in it these days. That is a 50% reduction from the total number of stocks available to investors in the mid-1990s as the dot.com boom was bringing new companies to market at a rapid pace. The number of stocks peaked in 1996 and has been shrinking ever since.
A) When a company “goes public” they issue stock to a broad audience of investors as a means to: 1) raise money for the company, 2) increase the liquidity (trading availability) of their shares, 3) create a more broadly defined market price. This act of going public allows all the early investors a readily available market for them to sell their shares. Prior to going public, the ability for early investors to sell shares is limited. This public issuance of a company’s stock puts the company on the stock exchange creating a much wider audience for trading the stock. A number of companies have gone public over the past year as the easy availability of money and broad attractiveness of the stock market have combined to provide a rich environment for new companies. Some of the newly listed companies include Airbnb, Duckhorn Winery, and almost anything related to electric vehicles.
B) Where does the shrinking of available company stock come from? The shrinkage could come from companies acquiring or merging with others. More often, the companies are de-listed for failing to maintain a minimum stock price (nominally $4/share) or minimum financial requirements. While the de-listing of a company’s stock would seem like a terrible event, it may not be so for the owners. Remember, they “cashed out” some portion of their ownership stake when the company went public in the first place. Things have not progressed as planned, perhaps, or the going public itself was the ultimate goal (though they wouldn’t have said so).
That going public could be a sort of “end game” brings us to a relatively new term – SPAC, or Special Purpose Acquisition Company. Also known as “blank check” companies, a SPAC is basically a shell company formed for the sole purpose of acquiring a private company. The SPAC allows the private company to go public without having to go through a traditional Initial Public Offering (IPO), “going public”, process. In other words, it is a shortcut. The chart below shows that in the first ten weeks of 2021 we have already seen as many SPACs come to market as in the whole of 2020, a number 5x the year before.
The SPAC raises money based on the plan of an acquisition. It may or may not already be far along in negotiations with the target company. This need to raise money based, in some cases, on a vague plan has led to a raft of SPACs using celebrity tie-ins to improve their chances of attracting investors. The other way the SPAC attracts money is by targeting a company in a hot sector, like electric vehicles or alternative energy.
Fueling some of this newfound interest in the stock market is the emergence of investment apps like Robinhood. These apps make opening an investment account and trading stocks easier than ever. Adding to and fueling the emergence of a new cadre of investors are three recent changes in the stock investing landscape: 1) the ability of investors to buy fractional shares of companies, 2) the ability to buy and sell stocks seemingly cost-free, and 3) the dramatic increase in the ability to buy and sell options as a cheap proxy for buying shares of stock. All of these changes are delivering powerful new investing tools to the country’s largest demographic, just as this group reaches their prime earning years (see circle below with the length of the bars being the number of people in each age group).
While some might view the emergence of the trends above as similar to the period of time just preceding the dot.com market bust, it’s worth remembering that the dot.com bust was focused on the high-flying Nasdaq stocks of the day. Other chunks of the stock market held up relatively well. Smallcap stocks had substantially lagged the dot.com boom in the Nasdaq. The money shifted as the dot.com bubble burst with the chart below showing the period of the dot.com crash.
Today we see the possibility of a similar pattern on a smaller scale, where the long-favored tech/consumer sector might be giving way to long-shunned sectors like energy, financials, and materials. We will see how it all plays out. The stock market always has its ups and downs, with corrections and rallies every few months; areas of exuberance and areas of neglect. SPACs will overheat and lose their shine at some point with the investing crowd suddenly deciding to place money elsewhere. At a high level though, it seems quite possible that the broad stock market is entering a new period of long-term bullishness rather than breathing the last gasp of a dying bull. Our models make no subjective judgement, of course, instead reading the daily price and volume tea leaves to discern the market’s underlying trend.
Investors looked to a mid-week Federal Reserve meeting for guidance. Markets hoped the meeting would provide the central bank’s view of a sharp recent rise in interest rates. Ahead of that meeting, stocks shook off a sluggish start Monday to post a +0.6% rise, followed by little change in prices Tuesday. Wednesday brought Fed Chair Powell’s reiteration of support for low interest rates as he suggested that it would be at least another 12-18 months before a hike in short-term rates. Stock investors appeared to cheer the news, overcoming early session weakness to close higher by +0.4%. But Thursday, investors read the Fed’s words differently, seeming to feel that it might be too soft in the face of expectations for an uptick in inflation. Yields popped higher once again sending stocks lower by -1.5% with the Nasdaq giving up twice that amount. A strong earnings report from FedEx(FDX) halted the market’s downward bias Friday leaving stocks flat to mixed on the day.
A modest down week as market volatility picked up. For the week, the S&P 500 (SPY) dipped -0.84%. The Nasdaq 100 (QQQ) was off -0.74%. The smallcap Russell 2000 (IWM) retreated from record high levels with a -2.85% slide.
Warm wishes and until next week.