November 24, 2019

Why Markets Rise as Discourse Falls

golfer in a suit

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.


2019 11 24 Chart 1 EquitiesNetIssuance


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
David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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