U.S. stock market: What are you really buying?

Major stock indexes hang near their all-time highs, while the number of public U.S. companies has plunged since the mid-1990s. What do these diverging trends mean for investors’ portfolios?

November 1, 2016 | 3 minute read

Major stock indexes – including the S&P 500 – hang near their all-time highs. Yet investors may not have noticed that the number of public U.S. companies has plunged since the mid-1990s and hovers near an all-time low since data collection began in 1975.¹ These are starkly diverging trends: higher stock prices but a shrinking pool of publicly traded companies in the U.S. It is important to understand the implications for investors’ portfolios.

There are approximately 3,700 publicly traded companies in the U.S.¹ That number is down 50% from the mid-1990s, and is close to the four-decade low of 3,563.¹ While corporate profits have remained relatively flat since 2012, stock prices have generally benefited from easy monetary conditions in the U.S. and significant quantitative easing from global central banks.

Moreover, the trillions of dollars flowing into U.S.-focused exchange-traded funds (ETFs) and equity mutual funds are generally chasing the same 3,700 companies. As of June 2016, U.S. equity mutual funds held $6.1 trillion in assets.² U.S. equity-focused ETFs, the “passive” investing brethren of mutual funds, add another $1.4 trillion of investment capital.² With the pool of publicly traded U.S. companies shrinking, we expect that any significant shift in investor sentiment – triggered by, for example, an adjustment of expected Federal Reserve policy action or other macro headline – may create significant waves in the form of market volatility.

While it is worth taking a moment to consider the possible sources of the multiyear decline in U.S. publicly traded stocks, pinning down one specific cause has proved elusive, as NBER economists found in their paper “The U.S. Listing Gap.” They cite the delisting of stocks due to increased mergers and acquisitions, which picked up after 1996. Yet there has also been a downtrend in new public offerings alongside a rise in private equity ownership. For this, the authors cite generally dissuasive factors of being public, including higher regulatory costs. The downtrend in the number of publicly traded stocks is not new; it has been in place for the last 20 years.¹ We believe there is little reason to expect it to reverse anytime soon. A big challenge facing investors today is constructing a diversified portfolio, and we believe the shrinking pool of publicly traded equities is one source of this problem.

Finally, 3,700 companies is only a tiny fraction of total companies in the U.S. The $18 trillion U.S. economy ($18.7T in Q3 2016³) is built on millions of small businesses and approximately 200,000 middle market firms. Middle market companies generate a third of U.S. private sector growth.⁴ If 3,700 is less than 1% of the total companies in the U.S., then investors may be missing out on the other 99% of companies that comprise the U.S. economy and contribute to U.S. growth. Investors seeking growth may benefit from broadening their perspective on what it means to invest in the U.S. economy.


What are you really buying?

  • Data from 1972–2012: “The U.S. Listing Gap,” NBER Working Paper No. 21181, Doidge, Karolyi, Stulz, May 2015; Data from 2013–2015: Stulz & Wilshire Associates.

  • The Investment Company Institute, as of June 30, 2016.

  • Bureau of Economic Analysis as of Third Quarter, 2016 (Advanced Release).

  • National Center for the Middle Market, 3Q 2016 Middle Market Indicator.

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Lara Rhame

Chief U.S. Economist + Managing Director

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