How fewer publicly traded companies, fewer stock shares outstanding, and more intangible assets have led to higher earnings growth for U.S. listed companies and ultimately stronger stock market performance.
In this episode you’ll learn:
- Why the number of publicly listed companies, particularly small companies, is shrinking.
- What is the impact in the increase in intangible assets held by businesses.
- What is the impact of share buybacks by global companies.
- How employer monopsony suppresses wages.
Show Notes
The Shrinking Universe of Public Firms: Facts, Causes, and Consequences – René M. Stulz – NBER
Global equity market shrinks as buybacks surge – Financial Times
Reflections on Dwindling Worker Bargaining Power and Monetary Policy – Alan B. Krueger
Serious Implications: Forecast Skew Over the Next Decade- Ed Easterling – Crestmont Research
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Episode Summary
Every investor keeps a close watch on the stock market, and on this episode of Money For the Rest of Us, David considers why the stock market has been shrinking over the past few years. By listening to this episode you’ll learn why the number of small, publicly listed companies is shrinking and how holding intangible assets can impact these companies. You’ll also hear about the increased amounts of buybacks that are leading to a shrinking market and discover factors that lead to a monopsony. It’s an episode full of insights that you don’t want to miss, so be sure to listen.
Why is the number of small, publicly listed companies shrinking?
In 1976 the number of companies publicly listed in the US was at 4,900. By 1997, there were 7,000, and then it shrank to only 3,600 in 2016. While this is a global phenomenon, it’s especially prevalent in the United States. Putting aside the number of mergers and acquisitions, there are simply fewer smaller companies going public. As a result, the average company size in the stock market is getting both bigger and older. Older companies are also more likely to engage in share buybacks.
Holding intangible assets has a huge impact on small companies
Smaller, younger companies tend to hold more intangible assets, such as research/development, brand, employees, advertising, etc. Many of these intangibles are expensed rather than being capitalized as assets. When intangible assets are expensed, they reduce the company’s earnings. Data from Stulz’ research at the Ohio State University shows that in 1975, 13% of publicly listed firms had documented losses, compared to 37% of firms in 2016. Most of the publicly traded companies had negative earnings, and it’s this evolution of the investment in these intangibles that is reducing the earnings.
Since smaller companies are holding more intangible assets (for example, intellectual property), there’s a disincentive to list publicly. By doing an initial public offering, a small company opens the door for competitors to view its intellectual-based work. And even if the small company were to list, they may not be rewarded by the stock market because their earnings aren’t very high (because of expensing investments rather than capitalizing them.) For the full story behind why intangible assets have such an impact on the shrinking stock market, be sure to listen to this episode.
Increased amounts of buybacks are leading to a shrinking stock market
After smaller companies holding intangibles, the second big shift in the stock market is share buybacks. It’s leading to an overall shrinking market. Stulz’ research also shows that the amount of repurchase shares in excess of newly issued shares is $3.6 trillion since the peak in 1997. Goldman Sachs forecast overall volume of U.S. buybacks will reach $1 trillion dollars in 2018. Because of this trend, the global equity market is shrinking in terms of the number of shares outstanding.
The factors that lead to a monopsony and how it impacts wages and investment opportunities
Finally, David discusses the multiple factors that lead to lower employee wages, concentrated employers, and higher shareholder profits. The term “monopsony” is used to describe a situation where there’s a buyer’s market (the employer). This is unfortunately common in small towns, where there’s only one large employer that is able to compress wages, equaling more profits going to shareholders. In addition to only one large employer being present, the following factors also contribute to a monopsony: less collective bargaining, more temp services, limited mobility for employees, no-poaching clauses for franchises, and non-compete agreements.
monopsony environments lead to increased profit margins and profitability, but exceptionally high profits cannot continue booming for forever. High-profit margins often lead to additional competition, which suppresses profits. Historically, this begins by new companies being formed, more initial public offerings, new share issuance, and an increased number of shares outstanding.
The US stock market trends are impossible to predict with absolute certainty, but David proposes some interesting points to consider when looking towards future investment opportunities – all on this episode of Money For the Rest of Us. Be sure to listen.
Episode Chronology
[0:08] Observations on the current state of the US stock market[4:01] What if there’s something going on within the US market that suggests continued outperformance is coming?
[7:23] Why the number of publicly listed companies, particularly small companies, is shrinking
[14:52] The impact of intangible assets within small companies
[18:21] Increased amounts of buybacks are leading to a shrinking stock market
[20:38] Multiple factors are contributing to higher shareholder profits, yet lower wages for employees
[26:05] What are the investment implications of low wages due to monopsony?
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Transcript
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