I think the US markets are in the early phases of a long term bull market. However, as a caveat, I do not believe the direction will be straight up. In fact, there could be a near term large decline due to a recession in the second half of 2017 and increased volatility due to global events in the Middle East and Europe as well as domestic events, such as the US Presidential election and the aftermath of a victory by either candidate.
Nevertheless, I believe 5 years from now US stock indices (DJIA, NASDAQ, S&P500 ,Wiltshire 5000) will all be significantly higher. If my theory is correct a dollar cost averaging program (buying the same dollar amount each month) of an index fund will be a successful strategy.
In a paper published by the National Bureau of Economic Research (NBER) and available on SSRN (Social Science Research Network), for those that do not have NBER access, authors Craig Doidge, George Andrew Karolyi and Rene Stulz state:
“We show that the U.S. has a listing gap relative to other countries with similar investor protection, economic growth, and overall wealth. The listing gap arises in the late 1990’s and widens over time.
We also find the U.S. has a listing gap when compared to its own history after controlling for changing capital capital market conditions (here).”
According to Business Insider, quoting the above paper, the number of stock listings in the US in 1996 was 8,025 and in 2012 that number was 4,102. This is a decrease of 49% over the period. Research from Jason Voss, CFA in a blog post titled “The Listing Decline is Worse than You Think” puts the decline from 1997 and 9,253 publicly listed companies to 4,916 by 2012. Both studies show a significant decline in public company listings.
Without going into the authors’ conclusions in too much detail, the reasoning suggested for the decline appears to be a large number of delistings and less new listings.
The first reason, the increase in delistings is related to the increase in merger and acquisition activity. With interest rates at historical lows and tax laws making debt tax deductible, companies have been on a buying spree, as seen in the chart below.
The decline in new listings is directly related to the decrease in IPOs (Initial Public Offerings). Public offerings increase as market sentiment increases and with two crashes in the last 16 years, sentiment is low. However, the number of IPOs has increased recently – which is part of my theory and will be explained below.
The decline in public companies is not just a US phenomenon. The two charts below show US total listings and the global trend.
During the period after the dotcom bubble the percentage of Americans invested in the stock market has declined to a record low.
It has taken 16 years for the Wiltshire Price Cap index to make a new high from the dotcom high. The housing bubble briefly topped the dotcom high, but then a large decline hurt those investors again. This has scared investors away from the stock market and explains the negative sentiment and record lows in numbers of investors.
However, this is a pattern that seems to be repeated throughout market history.
In my opinion history is repeating and we have just had the breakout of the multi-decade consolidation. The number of IPOs is down because the number of investors has declined. The increase in mergers and acquisitions is due to historically low interest rates, however, that trend is beginning to reverse. If my theory is correct the number of investors will increase before the number of listed companies increases. The “scarcity” of good equities should push solid larger capitalization stocks higher, as increased demand will interact with a decreased supply.
This will draw more investors into the market. As interest rates rise and there is less M&A activity, companies will begin to spin off divisions into stand alone companies increasing IPOs and as the number of investors increase, sentiment should increase. This should support the long term bull market. However, it will not be a smooth ride, but the direction is higher.