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There is a global shortage of stock supply as fewer companies go public and buyback programs increase.
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Net issuance of new shares by global companies is at its most negative since 1999, according to JPMorgan.
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“Every year we remove $1.2 trillion worth of stocks from markets for investors to purchase globally due to buybacks,” said Josh Brown of Ritholtz Wealth.
A spate of buybacks, fewer secondary equity offerings and a tepid IPO market are contributing to a global stock supply shortage, according to a recent note from JPMorgan.
Analysis conducted by JPMorgan’s Nikolaos Panigirtzoglou shows that corporate stock buybacks remove more than $1 trillion worth of stocks from global markets each year.
The global universe of public stocks has shrunk by a net $120 billion so far this year, marking the most negative year of net new stock issuance since 1999, according to JPMorgan.
And as the supply of global stocks decreases, stock prices should continue to rise as long as demand remains constant or increases.
That’s the opinion of Josh Brown, CEO of Ritholtz Wealth Management, who said in a podcast appearance on Thursday that unless there is another surge in new company IPOs like in 2021, stock prices will be affected by the continued decline in the Stocks are likely to experience a long-term tailwind from supply.
“Each year, we remove $1.2 trillion worth of stocks from markets around the world due to buybacks for investors to purchase. This is a fact and nothing will change, and this year it will go even higher. Both in the U.S., but now abroad, where one country after another is looking at the U.S. model and saying, “Do you actually know how to fix your capital markets first?” Brown said in CNBC’s midterm report.
“China is doing it, Japan is doing it, Larry Fink just dedicated his entire shareholder letter to 17 countries around the world that are engaging with this idea of, ‘Hey, let’s do what America did, let’s fix our stock market “So that’s what’s happening, and that’s going to bring more and more buybacks, which means there are fewer and fewer places to put money to go,” Brown said.
Another source of money used to buy up companies is private equity, which is sitting on about $2 trillion worth of dry powder waiting to be invested. Not to mention the more than $6 trillion that could be sitting in money market funds and ultimately flowing into the stock market.
“That means more companies are exiting the market,” Brown said. “There are over three thousand stocks, when I started in this business there were 7,000. Now most of these missing stocks are penny stocks, so throw that away. But the Wilshire 5000 still can’t even support an index. “There aren’t enough public stocks to fill it.”
“Here’s the bottom line: Without another five years like 2021, in which every piece of shit on the planet can leak into the public, we simply won’t have enough emissions to saturate the pools of capital that need to put money into the stock market.” “Brown said in his podcast episode on the topic this week.
Other tailwinds for the stock market include ongoing disinflation, possible interest rate cuts by the Federal Reserve and increasing adoption of artificial intelligence, according to Brown.
Read the original article on Business Insider